Tax Strategy
The §481(a) catch-up adjustment: How to claim missed depreciation on your short-term rental
If you didn't optimize depreciation when you launched your STR, you haven't lost those deductions. Here's how to claim everything at once — without amending a single prior return.
What is a §481(a) adjustment?
When a taxpayer changes from one accounting method to another — in this context, from standard straight-line depreciation to cost segregation with bonus depreciation — the IRS requires a reconciliation of the difference. That reconciliation is the §481(a) adjustment.
In plain terms: it's the gap between the depreciation you actually took and the depreciation you were entitled to take. The IRS allows you to claim that entire gap as a deduction in the current year, rather than requiring you to go back and amend every prior return.
Total depreciation you were entitled to take − Total depreciation you actually took
Why this matters for STRs specifically
Short-term rentals are classified as nonresidential real property (39-year), which makes them eligible for Qualified Improvement Property (QIP) — a category of interior renovations that long-term residential rentals cannot access. This means STR owners often have more eligible assets, and larger catch-up adjustments, than owners of other rental property types.
Which bonus depreciation rate applies to your catch-up?
A common question is whether the catch-up uses today's bonus depreciation rate or the rate that was in effect when the property was placed in service. The answer is the rate from when it was originally placed in service.
This matters because rates have changed significantly over the years. A property placed in service during the TCJA "golden era" (September 2017 through December 2022) was entitled to 100% bonus depreciation — even on used property — regardless of when you file the Form 3115 to claim it.
Highlighted rows indicate 100% bonus depreciation windows — the most valuable periods for catch-up adjustments.
How to claim the adjustment: a four-step process
Commission a cost segregation study
A qualified engineer or CPA identifies components of your property that qualify for shorter depreciation schedules. Fairly can connect you with CPAs who are experienced with cost segregation on short-term rentals specifically. For STRs, the study typically identifies two categories of shorter-lived assets:
Furniture, decorative lighting, removable flooring, appliances
Landscaping, fences, patios, and interior renovations (QIP)
Calculate the §481(a) adjustment
Using the cost segregation study, calculate the depreciation you were entitled to take (applying the bonus rate in effect when the property was placed in service) versus what you actually took. The difference is your §481(a) adjustment — and it's deductible in full in the current year.
File IRS Form 3115
A change in depreciation method requires filing Form 3115 (Application for Change in Accounting Method). Under Rev. Proc. 2024-23, depreciation changes are typically automatic — meaning IRS pre-approval is not required.
Filing: Attach Form 3115 to your timely filed return and mail a duplicate copy to the IRS office in Ogden, UT. No amended returns required.
Apply the deduction
A negative §481(a) adjustment — one that favors the taxpayer — is taken in full in the year of the change. Depending on its size, it may:
- Offset current rental income
- Offset W-2 or business income (if the STR loophole conditions are met)
- Generate a Net Operating Loss (NOL) that carries forward to future years
Timing: participation must be in place in the year of the adjustment
The §481(a) adjustment is claimed in the current tax year — which means material participation requirements must be met in that same year for the losses to be non-passive and usable against W-2 or business income. Claiming the deduction without meeting participation requirements in the year of the adjustment means the losses will be passive, limiting what they can offset.
If you're managing your STR through Fairly, the platform is structured to support material participation — keeping pricing, calendar, and key operational decisions with you while caretakers handle on-the-ground execution. Fairly can also connect you with CPAs who can help document and substantiate your hours.
Document that no individual at the prior manager exceeded 100 hours
If you can obtain records from your prior management company showing that no single employee logged more than 100 hours on your property, and you can demonstrate you exceeded their hours, material participation may still be established for the current year. This requires clear documentation and should be coordinated with your CPA.
Wait until the following year to execute the strategy
If documentation from a prior manager isn't available or is ambiguous, the cleaner path is to transition to a participation-friendly management model — such as Fairly — and execute the §481(a) adjustment in the first full tax year where your participation is clearly established and documented from day one.
Frequently asked
What is a §481(a) adjustment?
It's the catch-up calculation required when you change depreciation methods. It represents the difference between the depreciation you were entitled to take and what you actually took — and it can be claimed as a single deduction in the current year, rather than by amending prior returns.
Do I need to amend prior tax returns to claim missed depreciation?
No. The §481(a) mechanism specifically avoids the need to amend prior returns. You file Form 3115 with your current-year return and claim all missed depreciation as a single deduction in the current year.
Which bonus depreciation rate applies to my catch-up adjustment?
The rate that was in effect when the property was originally placed in service — not the current rate. For example, a property placed in service between September 2017 and December 2022 would use the 100% bonus depreciation rate from that era, even if you're filing the Form 3115 today.
What is Qualified Improvement Property (QIP) and why does it matter for STRs?
QIP refers to interior improvements made to a nonresidential building after it was placed in service — excluding structural framework, elevators, and escalators. Because short-term rentals are classified as nonresidential property, interior renovations qualify as 15-year QIP assets eligible for bonus depreciation. Long-term rentals classified as residential do not have access to QIP treatment — making this one of the meaningful tax advantages of the STR classification.
Official IRS resources
IRS Form 3115 Instructions
How to file a change in accounting method and apply the §481(a) adjustment
Rev. Proc. 2024-23
IRS guidance on automatic changes in accounting method, including depreciation
IRS Publication 946: How to Depreciate Property
Comprehensive guidance on MACRS, bonus depreciation, and QIP
How to Use the Short-Term Rental Tax Loophole to Offset W-2 Income
Depreciation on Short-Term Rentals: 27.5 or 39 Years?
Not sure if a catch-up adjustment applies to
you?
Fairly's team can help you think through your property's
depreciation history and what to bring to your tax advisor.
This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are complex and subject to change. Results vary significantly based on individual circumstances. Always consult a qualified CPA or tax strategist before implementing any tax strategy.
Alana Moore, CPA
Alana is an accounting manager at Fairly, where she works with homeowners on the tax and financial dimensions of short-term rental ownership.