What is MACRS depreciation?
The Modified Accelerated Cost Recovery System (MACRS) is the IRS method for depreciating business assets, including rental property. Depreciation is a non-cash deduction — it reduces your taxable rental income each year without any actual cash outflow, making it one of the most powerful tax advantages available to real estate investors.
Residential rental buildings generally use 27.5-year GDS and the mid-month convention. Dividing depreciable basis by 27.5 gives an approximate full-year amount, but the first and final years are partial. Land is not depreciable. Nonresidential real property generally uses 39 years.
Calculating your annual depreciation
Basis allocation must be supportable. Tax assessments, appraisals, closing documents, and other evidence may be relevant, but a generic land percentage is not authoritative. Basis also requires proper treatment of acquisition costs, improvements, credits, and personal-use periods.
MACRS property classes
Not everything in a rental property depreciates over 27.5 years. Personal property and land improvements qualify for shorter recovery periods — this is the basis of cost segregation.
| Asset class | Recovery period | Examples |
|---|---|---|
| Residential rental building | 27.5 years | Structure, roof, walls, windows |
| Commercial building | 39 years | Office, retail, industrial |
| Land improvements | 15 years | Landscaping, parking lot, fencing, sidewalks |
| Personal property (appliances) | 5 years | Appliances, carpeting, fixtures |
| Office furniture / equipment | 7 years | Desks, computers, office equipment |
| Land | Not depreciable | Raw land value — never deductible |
Cost segregation — accelerating the deduction
A cost segregation analysis identifies components that may qualify for shorter recovery periods instead of remaining part of the building. It accelerates deductions; it does not create basis. Classification, placed-in-service date, business use, documentation, elections, and passive-loss rules determine the usable benefit.
Whether a study is worthwhile depends on quote, eligible basis, holding period, passive income, tax rates, financing, future sale, and documentation risk. A change involving property placed in service in an earlier year may require an accounting-method analysis and Form 3115; it is not simply a less formal calculation.
Bonus depreciation in 2026
Current law provides permanent 100% additional first-year depreciation for eligible depreciable property acquired after January 19, 2025. Eligibility and acquisition timing matter, and taxpayers may make applicable elections. The older scheduled 20% rate is not the governing 2026 rule for this qualifying property.
Qualifying property generally includes certain MACRS property with a recovery period of 20 years or less; the 27.5-year residential building itself does not qualify. Properly classified 5-, 7-, or 15-year components may qualify, subject to the statute, placed-in-service rules, business use, and elections.
| Year | Bonus depreciation rate | Applies to |
|---|---|---|
| 2022 | 100% | ≤20-year property |
| 2023 | 80% | ≤20-year property |
| 2024 | 60% | ≤20-year property |
| 2025 through Jan. 19 | Transition rules apply | Confirm acquisition date |
| After Jan. 19, 2025 | 100% | Eligible qualifying property |
| 2026+ | 100% under current law | Eligibility and elections apply |
Depreciation recapture — the hidden cost at sale
Depreciation reduces adjusted basis, which can increase gain on sale. For depreciable real property held long term, part of the gain may be unrecaptured Section 1250 gain taxed at a maximum federal rate of 25%. That is not the same as automatically taxing every depreciation dollar at a flat 25%. Shorter-life components, ordinary Section 1245 recapture, losses, NIIT, state tax, and transaction details can change the result.
over 10 yrs
The example only illustrates timing and a maximum rate; it is not a sale-tax forecast. A qualifying Section 1031 exchange can defer recognized gain, but strict property, timing, identification, intermediary, basis, and boot rules apply. Deferral is not permanent forgiveness, and future law or estate facts should not be assumed.
Depreciation is a basis-recovery system, not free money. Correct basis, land allocation, placed-in-service month, asset classification, passive-loss capacity, elections, and exit plan all matter. Cost segregation can accelerate deductions but may also accelerate recapture and professional costs. Use the calculator for a first-year estimate and engage a qualified tax professional for the return and sale strategy.