Depreciation Rules
Depreciation Classes: 5, 7, 15, 27.5, and 39 Years
An orientation to the recovery periods that matter in a cost segregation study, what each generally covers, and how they are depreciated.
Part of the Depreciation and Bonus Rules hub. See also the FAQ and the glossary.
The heart of a cost segregation study is the classification of costs into recovery periods. This page gives an orientation to the periods that most often arise for rental and commercial real estate. It is general and simplified.
Why classes exist
The tax code assigns recovery periods to categories of property under the Modified Accelerated Cost Recovery System, commonly called MACRS. A building is treated as a long-lived asset. Personal property and land improvements are treated as shorter-lived. A study applies these categories to the actual components of a property.
The five recovery periods
| Recovery period | General category | Typical method and convention |
|---|---|---|
| --- | --- | --- |
| 5 years | Certain personal property, such as some appliances, carpeting, and certain equipment | Declining balance, half-year convention generally |
| 7 years | Office furniture, some equipment, and property without another assigned class | Declining balance, half-year convention generally |
| 15 years | Land improvements such as paving, fencing, and landscaping; also qualified improvement property | 150 percent declining balance for land improvements, half-year convention generally |
| 27.5 years | Residential rental property | Straight line, mid-month convention |
| 39 years | Nonresidential real property | Straight line, mid-month convention |
Land has no recovery period because it is not depreciable.
What "declining balance" and "straight line" mean
Straight line deducts an equal amount each year. Declining balance deducts a percentage of the remaining basis each year, which produces larger deductions in early years. Conventions determine how much is deducted in the first and last years. If bonus depreciation applies to qualifying assets, a large share of cost may be deducted at once. See How Bonus Depreciation and Cost Segregation Interact.
Where a study fits
The study does not change the categories. It determines which components fall into which category. A rental building bought for a lump sum is presumed to be a single 27.5 or 39 year asset unless a study or other analysis separates components.
The two long classes
27.5 years applies to residential rental property, which generally means buildings where a substantial portion of rents come from dwelling units. 39 years applies to nonresidential real property, such as offices, retail, and warehouses. Some properties fall in gray areas, such as certain short-term rentals and mixed-use buildings. See Residential Rental Property and the 27.5 Year Class, Nonresidential Property and the 39 Year Class, and Short-Term Rentals: The Study Decision.
The shorter classes
5 and 7 years cover personal property. The distinction between an item that is part of the building and an item that is personal property is a matter of facts and legal analysis. 15 years covers land improvements. See Examples of 5 and 7 Year Property in Rentals and Commercial Buildings and Land Improvements and the 15 Year Class.
Some limits on the classification
Not every item can be pushed into a short class. Structural components, such as walls, roofs, and most building systems, are generally part of the building. Items that serve the operation of the building itself, such as general HVAC, generally remain in the long class, while items that serve a specialized business process may qualify as personal property. A study analyzes those distinctions.
Why the same dollars have different values in different classes
A dollar of cost in a 5 year class can generate deductions sooner than a dollar in a 39 year class. That is the whole idea. The value of the difference depends on your tax rate and on your ability to use the deductions. See Tax Bracket and Whether Deductions Are Usable.
Hypothetical illustration
A hypothetical $10,000 item is depreciated over 39 years straight line, producing roughly $256 of deduction in a full year. If the same item were 5 year property with bonus, up to the whole $10,000 might be deducted in year one. The total is the same; the timing is not. See Hypothetical: A Single Rental With Usable Deductions.
Where owners get tripped up
Two errors are common. One is assuming that all improvements to a rental are 27.5 year property, which ignores land improvements and personal property. The other is assuming that anything inside the building is personal property, which ignores the structural nature of many components. Both errors are avoided by looking at the actual facts item by item, or by having a study do so.
How to read a class assignment
When a study assigns an item to a class, it should cite the reasoning. The IRS publishes tables of asset classes that describe categories of property and their recovery periods. Real estate businesses have their own asset classes for certain items. A study uses these to justify placing an item in the 5 or 7 year category. Ask a provider to show how they matched an item to a class, since this is central to the study's support.
Why the class matters for recapture
The class also determines how recapture works. Depreciation on personal property is recaptured as ordinary income up to gain. Depreciation on real property is treated differently. So the class assignments affect not only timing but also the character of the gain on sale. That is another reason the decision should include the exit.
A reminder about limits
The recovery periods described are general. Special rules apply to certain property, such as qualified improvement property, and to certain elections, such as the alternative depreciation system, which uses longer periods. Ask your preparer if any special rule applies to you.
Next steps
Read the class-specific pages, starting with Examples of 5 and 7 Year Property in Rentals and Commercial Buildings, then Cost Segregation Decision Checklist.