Property Used in a Trade or Business
Depreciation is allowed only for property used in a trade or business or held for the production of income. Personal-use property is outside that rule. Section 179 is narrower than §167 because it requires active conduct of a trade or business.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- §167(a) covers business-use property and property held to produce income, including many rentals.
- A personal residence is not depreciable while you live in it.
- Land is not depreciable even when used in a business.
- §179 requires use in the active conduct of a trade or business, a narrower test.
- Mixed personal and business use requires an allocation; this page does not compute that split.
Section 167(a) allows depreciation for property used in a trade or business, and for property held for the production of income. Rental real estate generally falls in the second category. Publication 946 states that land and certain excepted property cannot be depreciated, and that personal-use property is outside the allowance.
Cost segregation does not change that threshold. If a building is not used in a business and is not held to produce income, splitting it into components does not create a depreciation deduction. The study assumes the §167(a) door is already open.
Section 179 is narrower. Section 179 property must be acquired by purchase for use in the active conduct of a trade or business. A rental that qualifies for depreciation under §167(a)(2) may fail that active-conduct test. Bonus depreciation under §168(k) follows the qualified-property rules, not the §179 active-conduct sentence, but listed property used 50 percent or less for business is still excluded from bonus.
Mixed-use property is allocated. If property is used partly in a business or for income production and partly for personal purposes, only the business or income-producing share is depreciable. Treas. Reg. §1.48-1(b)(2) states the same idea in the investment-credit definitions that studies still use: if depreciation is allowable on only part of the property, only that part qualifies as the relevant property.
This page is educational information, not tax advice. Whether an activity is a trade or business, a rental held for income, or a personal residence is a fact question for the taxpayer and the taxpayer’s CPA. Publication 527 covers residential rentals; Publication 946 covers the general allowance.
Conversion and mixed use
When a home is converted to a rental, depreciation generally starts from the conversion date, using the lesser of cost or fair market value as of that date. Publication 527 covers residential rentals. The conversion mechanics belong with the taxpayer’s CPA.
The placed-in-service date for the rental activity is when the house is ready and available for rent, not necessarily the day the owner moved out. See the placed-in-service page.
Converting a rental back to a personal residence ends the §167(a) allowance for the personal-use period. Recapture and basis adjustments on a later sale are CPA questions. This page does not compute them.
Land, inventory, and excepted property
Land is not depreciable. A business that owns land still takes no depreciation on the land share. Cost segregation that forgets the land split overstates every class.
Inventory is not depreciated; it is accounted for under the inventory rules. The tangible-property de minimis safe harbor does not apply to inventory. Materials and supplies have their own regulation.
Section 167(e) disallows depreciation on certain term interests when a related person holds the remainder. That is a split-ownership rule, not a building-classification rule.
Why the two-part test matters for studies
Investor-owned rentals are often held for the production of income rather than as an active trade or business. They can still be depreciated. They may not be eligible for §179. Collapsing those two results is a common error in informal explanations.
Hotels and other operating properties are typically trades or businesses. Their building class is still a §168(e)(2) question — usually nonresidential because of transient lodging — not an automatic 27.5-year residential result.
Tax-exempt use and personal use sit outside the deduction. A study of a mixed-use building must allocate, not assume 100 percent business use.
Elections that do not create use
Electing bonus depreciation or §179 does not convert personal-use property into business property. The use test comes first.
An electing real property trade or business under §163(j) is already in a trade or business. That election forces ADS on its real property and QIP and takes those assets out of bonus. It is not a use test; it is a method overlay.
Qualified production property under §168(n) requires a qualifying production activity and an election. This page does not decide that any reader’s activity qualifies. Discuss that election with a CPA.
This page is educational information, not tax advice. Cost segregation assumes the §167(a) door is already open. Super Intelligence is proposed documentation support; it does not decide whether an activity is a trade or business. Publication 527 and Publication 946 are the IRS explanations to read with the statute; they are not a substitute for the taxpayer’s CPA on mixed-use or conversion facts.
Sources
- 1
- 2IRS Publication 946 — How To Depreciate Property (2025)(opens in a new tab)
Appendix B reproduces the Rev. Proc. 87-56 class lives.
- 3