Rev. Proc. 96-31

Audio summary

A short audio walkthrough of this rule: what it says and why it matters for your study.

What it holds

Provided automatic consent for a taxpayer who claimed less depreciation than allowable to change to the correct method. The full catch-up amount (the Section 481(a) adjustment) was taken in the year of change via Form 3115, with no amended returns needed.

Where this comes from

Before 1996, fixing a depreciation error meant amending every prior tax return affected by the error. For a building held for five or ten years, that could be five or ten separate amended returns. The cost and effort kept many property owners from correcting under-depreciation.

Revenue Procedure 96-31 changed that. It created an automatic consent path. You did not need IRS permission in advance. You filed one form, Form 3115, with your current return. You calculated all the missed depreciation from prior years and claimed it all at once.

What it established

The key mechanism is the Section 481(a) adjustment. This is the accounting term for the catch-up amount when you switch from one method to another. Under Rev. Proc. 96-31, a taxpayer-favorable Section 481(a) adjustment could be taken entirely in the year of change.

So if you had owned a building for five years and missed $50,000 in accelerated depreciation, you did not get $10,000 per year going back. You got the full $50,000 in the year you filed Form 3115.

How it shows up in a study

The retroactive or look-back cost segregation study is a direct product of what this procedure made possible. You can own a building for years, decide to do a study now, reclassify the components, and still capture every dollar of missed write-offs back to when you placed the building in service.

Rev. Proc. 96-31 has been superseded. The current framework is Rev. Proc. 2015-13, and the current annual list of automatic changes is Rev. Proc. 2025-23. But the logic and the structure of those current rules trace directly back to this 1996 starting point.

What it does not mean

This specific procedure is no longer operative. Citing it as current authority in a cost segregation filing would be incorrect. The current rules must be cited.

Its historical role is important: it is the origin of the system that makes retroactive studies work. Understanding it explains why the modern rules exist and why the Form 3115 catch-up process functions the way it does.

Category

Methodology & procedure

Applies to

All property types

Status

Vetted

This page explains a tax authority in plain words. It is not tax advice for your situation. The way this authority applies to your property is reviewed by a licensed tax professional. Citation is provided so you or your advisor can read the primary source.