27.5-Year Residential Rental Property
Residential rental buildings are depreciated over 27.5 years if at least 80% of their gross rental income comes from dwelling units. Hotels and similar transient lodging do not count. The test is applied building by building, and owner-occupied portions count at rental value.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- The 80% test is applied to gross rental income from dwelling units, building by building.
- Units in a hotel, motel, or other establishment where more than half the units are used on a transient basis are not dwelling units.
- Residential rental property uses straight line with the mid-month convention.
- Under ADS, the period is 30 years for property placed in service after 2017.
- Appliances, carpet, and site work inside a residential project can still be shorter-lived property.
Section 168(e)(2)(A) defines residential rental property as a building or structure where 80% or more of the gross rental income for the year is rental income from dwelling units. A dwelling unit is a house or apartment used to provide living accommodations. If the owner lives in part of the building, the rental value of that part is included in gross rental income for the test.
Residential rental property has a 27.5-year GDS recovery period and is depreciated straight-line using the mid-month convention. Under ADS, the period is 30 years for property placed in service after 2017.
The building class is the first question in a residential study. Getting 27.5 versus 39 wrong dominates any later component analysis. A mixed-use building that fails the 80% test is nonresidential real property for the whole structure.
Inside a qualifying residential building, not every dollar is 27.5-year property. Publication 527 lists appliances, carpets, and furniture as 5-year property. Site paving and fencing are often 15-year land improvements. Those shorter classes do not change the building’s own life.
Short-term rentals, student housing, and senior living need a careful look at how the units are used. Educational information, not tax advice.
A residential study that starts by assuming 27.5 years for every structure on the site will misclass a leasing office or clubhouse. Set the building class first, then separate appliances, removable coverings, dedicated hook-ups, and site work. The building class is the large number; the study’s timing effect still comes from the smaller classes.
Transient use
The statute excludes units in a hotel, motel, or other establishment where more than half of the units are used on a transient basis. That is why hotels are generally nonresidential (39-year) property. Short-term rentals, extended-stay properties, and some student or senior housing need a careful look at how the units are used.
“Transient” is a facts question. The statute does not set a night-count in the definition sentence. Average stay, hotel-like services, and whether more than half the units are used that way all belong in the analysis.
A single-family rental advertised for long-term occupancy is the ordinary 27.5-year case. A building operated like a motel is the ordinary 39-year case. Properties in between should be reviewed with a CPA before a study locks the building class.
Mixed buildings
Because the test is income-based, a building with ground-floor retail can fail it if commercial rent reaches more than 20% of gross rental income. In that case the whole building is nonresidential real property.
The test is applied to the building or structure, not to the project as a whole. A garden apartment community can have 27.5-year residential buildings and a 39-year clubhouse or leasing office on the same site.
Owner-occupied portions count at rental value. A two-flat where the owner lives in one unit still includes that unit’s rental value in the denominator and numerator analysis. Publication 527 walks through the residential rental rules in more detail.
What a study separates out
Inside a residential building, appliances, carpet, furniture, and some dedicated wiring and plumbing can be 5-year property, and site work can be 15-year property. Publication 527 and the IRS residential rental matrix both describe these categories. The IRS matrix also notes that a stand-alone clubhouse or rental office building is nonresidential, 39-year property.
The residential matrix treats kitchen cabinets, counters, and sinks as part of the building. Dedicated range and dryer circuits and appliance hook-ups are the usual 5-year electrical and plumbing items in that matrix. Those rows are examiner guidance for residential rentals, not a rule for offices or hotels.
AmeriSouth XXXII, Ltd. v. Commissioner rejected most of a large apartment study’s shorter-life classifications and kept the contested items with the buildings. Residential studies have to stay inside the regulation and the facts, not a hoped-for percentage.
Bonus depreciation and residential buildings
The 27.5-year building is not qualified property under §168(k) because its recovery period exceeds 20 years. Shorter-lived components identified in the study can be.
As of October 16, 2026, those components can take 100% additional first-year depreciation if they were acquired after January 19, 2025 and otherwise qualify. Used appliances and similar personal property can qualify if the used-property acquisition rules are met.
ADS and electing real property trades
An electing real property trade or business must use ADS on its residential rental property, its nonresidential real property, and its qualified improvement property. The ADS period for residential rental property is 30 years for placements after 2017. Property required to use ADS is not bonus-eligible. That building-level ADS result does not, by itself, move appliances into a longer class.
The ADS election and the §163(j) real-property election are return decisions. A study should state which system it assumed.
Sources
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- 3IRS Publication 946 — How To Depreciate Property (2025)(opens in a new tab)
Appendix B reproduces the Rev. Proc. 87-56 class lives.
- 4IRS Publication 5653 — Cost Segregation Audit Techniques Guide (rev. 2-2025)(opens in a new tab)
Written for IRS examiners. The guide states it is not an official pronouncement of law and cannot be cited as authority. It predates the July 2025 law.
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