Why Depreciation Matters
Depreciation lets property owners deduct the cost of buildings and equipment over time. The timing of those deductions affects cash flow, which is why recovery periods matter. Land is never depreciable. Section 167 allows the deduction; section 168 computes it.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- Depreciation is a deduction for the wear, tear, and obsolescence of property used in a business or held to produce income.
- Land is never depreciable; buildings and equipment are.
- Shorter recovery periods do not increase total deductions, but they move them earlier.
- Section 168 sets the method, recovery period, and convention for most tangible property.
- Faster deductions reduce adjusted basis faster and can change the character of gain on a later sale.
Section 167 of the Internal Revenue Code allows a reasonable deduction for the exhaustion, wear and tear, and obsolescence of property used in a trade or business or held for the production of income. For most buildings and equipment, §168 (MACRS) sets how that deduction is calculated: the method, the recovery period, and the convention.
Depreciation is a non-cash deduction. You paid for the property up front; depreciation spreads that cost over the years the tax law assigns to it. Because a deduction this year is generally worth more than the same deduction years from now, the length of the recovery period affects the owner's cash flow.
The basis for depreciation is the adjusted basis used to measure gain on a later sale. Each year’s deduction reduces that basis. Taking more depreciation now does not increase the cost you can recover. It moves recovery forward and leaves less basis later.
Cost segregation exists because a building purchase is rarely one kind of property. Appliances, certain finishes, dedicated equipment connections, and site work can belong in shorter classes than the structure. Putting those items in the class the statute assigns is what changes the timing.
Whether accelerating deductions helps a particular owner depends on tax position, holding period, state conformity, and recapture on sale. Educational information, not tax advice.
What can and cannot be depreciated
Land is not depreciable. Personal-use property, such as your own home, is not depreciable either. A building held for rent, a store, a warehouse, and the equipment used in a business generally are. Certain land preparation and landscaping costs closely tied to a depreciable asset can be depreciated. Property placed in service and disposed of in the same year generally produces no depreciation.
Publication 946 states that certain property cannot be depreciated, and it lists land among those items. The ground itself stays in a non-depreciable account. What is built on or added to the land is analyzed separately as a building, a land improvement, or personal property.
Section 167(a) has two doors: use in a trade or business, or holding for the production of income. That second door is why investment rental property can be depreciated even when the owner is not running an active trade. Section 179 is narrower and requires use in the active conduct of a trade or business.
Why recovery periods change the picture
A $1 cost in a 39-year class produces small deductions spread over four decades. The same $1 in a 5-year class is deducted within about six tax years, and possibly all at once if bonus depreciation applies. Cost segregation exists to make sure each component is in the class the law actually assigns to it.
MACRS also changes the method. Five- and seven-year property generally use 200% declining balance. Fifteen-year property generally uses 150% declining balance. Buildings use straight line. Shorter classes therefore front-load deductions even before bonus depreciation is considered.
As of October 16, 2026, qualified property acquired after January 19, 2025 can take 100% additional first-year depreciation under §168(k). That rate does not apply to the 27.5- or 39-year building. It can apply to shorter-lived components that meet the qualified-property rules.
The trade-off
Faster deductions reduce the property's adjusted basis faster. When the property is sold, prior depreciation on personal property is generally recaptured as ordinary income under §1245. Whether accelerating deductions makes sense depends on your tax position and plans, which is a question for your CPA.
Recapture on buildings under §1250 is generally limited to depreciation in excess of straight line. Because MACRS already requires straight line for residential rental and nonresidential real property, additional depreciation on those buildings is usually none. The recapture difference is one reason classification between §1245 and §1250 matters at exit, not only in year one.
Allowed or allowable
Basis is reduced by depreciation that was allowable even if it was not claimed. An owner who treated the entire improvement as a 39-year building has already used the allowable building method on that return position. Changing the classes later is generally an accounting-method change, not a silent rewrite of old years.
That is why look-back studies are usually implemented on Form 3115 with a §481(a) adjustment rather than by simply amending each prior return. Your CPA decides which procedure fits the facts.
What depreciation is not
Depreciation is not an appraisal of current market value and not a reserve for replacement. It is a statutory allowance. Useful life and salvage value, which once drove §167 computations, do not set MACRS recovery periods.
Older useful-life cases such as Massey Motors v. United States are historical background. They do not decide whether a modern building component is 5-year or 39-year property.
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.
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