For federal tax depreciation, the useful life of a building for depreciation is set by statute, not by how long the structure will physically last. Residential rental buildings are recovered over 27.5 years and nonresidential (commercial) buildings over 39 years, both using the straight-line method and a mid-month convention.1GovInfo. 26 U.S.C. § 168(c) The land underneath the building is never depreciated, and certain components and improvements ride on their own, shorter schedules.
The Two Statutory Lives for Buildings
The Modified Accelerated Cost Recovery System (MACRS) assigns a fixed recovery period to real property based on how the building is used. Owners do not estimate this life. The classification, not the taxpayer’s judgment about durability or economic productivity, controls the number of years.2GovInfo. 26 U.S.C. § 168
Residential Rental Property: 27.5 Years
A building qualifies as residential rental property when 80 percent or more of its gross rental income comes from dwelling units. Dwelling units include houses and apartments but exclude units in hotels, motels, or similar establishments if more than half of the units are used on a transient basis. If the owner occupies part of the building, the rental value of that space counts in the gross rental income calculation.3GovInfo. 26 U.S.C. § 168(e)
Nonresidential Real Property: 39 Years
Real property used in a trade or business that is not residential rental property, and that has a class life of 27.5 years or more, is depreciated over 39 years. This is the standard life for offices, retail buildings, warehouses, and similar commercial structures.1GovInfo. 26 U.S.C. § 168(c)
The Mid-Month Convention
Both residential rental and nonresidential real property use a mid-month convention. The building is treated as placed in service or disposed of in the middle of the month regardless of the actual date, so the deduction in the first year and the final year will be smaller than a full year’s worth.4GovInfo. 26 U.S.C. § 168(d)
When the Alternative Depreciation System Applies
Some taxpayers must use, and others may elect, the Alternative Depreciation System (ADS). Under ADS, nonresidential real property is depreciated over 40 years. Residential rental property is depreciated over 30 years if placed in service after December 31, 2017, and over 40 years if placed in service before that date.5IRS. Rev. Proc. 2019-08 – Section 4 Taxpayers sometimes elect ADS to produce smaller annual deductions, for example to defer cost recovery through low-income years. The election is generally irrevocable once made for a class of property.6IRS. Rev. Proc. 2020-25
Land, Land Improvements, and Shorter-Lived Components
Land itself cannot be depreciated. The purchase price must be allocated between the nondepreciable land and the depreciable building and other improvements.7Legal Information Institute. 26 C.F.R. § 1.167(a)-2
Certain land improvements sit in the 15-year MACRS class and generally use the 150-percent declining balance method, which recovers cost faster than the straight-line method used on the building itself. A cost segregation study is the usual way owners identify assets that can be moved out of the 27.5- or 39-year building class into a shorter class.8GovInfo. 26 U.S.C. § 168(b)
Qualified Improvement Property
Qualified Improvement Property (QIP) covers interior improvements made to a nonresidential building after it has been placed in service. It does not include the cost of enlarging the building, installing elevators or escalators, or altering the internal structural framework.3GovInfo. 26 U.S.C. § 168(e) QIP carries a 15-year recovery period and can qualify for additional first-year (bonus) depreciation, with eligibility and the percentage depending on when the property was acquired and placed in service.9IRS. Treasury, IRS issue guidance on additional first-year depreciation
Repairs Versus Capital Improvements After Placed in Service
Once the building is in service, later spending is either a currently deductible repair or a capital improvement that must be depreciated. General repairs and maintenance can be deducted in the year paid unless the regulations require capitalization.10Legal Information Institute. 26 C.F.R. § 1.162-4 Costs that constitute a betterment, restoration, or adaptation of the property to a new use must be capitalized and depreciated under the recovery period and convention for that class of property.11Legal Information Institute. 26 C.F.R. § 1.263(a)-3
Can You Change the Useful Life?
The MACRS recovery periods are set by statute. You cannot shorten them because a building is wearing out faster than expected or lengthen them because it is holding up well.12Legal Information Institute. 26 C.F.R. § 1.446-1
You can, however, correct a misclassification. If a property was placed on the wrong recovery period, the fix is generally a change in accounting method made by filing IRS Form 3115, which allows the missed depreciation from prior years to be picked up as an adjustment in the year of the change.12Legal Information Institute. 26 C.F.R. § 1.446-1
One boundary worth noting: the useful life a business estimates for financial statements under GAAP is a separate number from the tax life. GAAP asks management to estimate the period the asset will be economically productive, and that estimate can be revised prospectively if new information supports it. The MACRS life on the tax return does not move with it.