Internal Revenue Code §167 — Depreciation
Section 167 is the base rule that allows a depreciation deduction for property used in a business or held to produce income. It does not set rates or periods. Section 168 supplies the method for most tangible property placed in service after 1986.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- §167(a) allows a reasonable allowance for exhaustion, wear and tear, and obsolescence.
- It covers property used in a trade or business and property held for the production of income.
- For most tangible property, the amount is computed under §168 (MACRS).
- Land and personal-use property are outside the allowance.
- Bonus depreciation and the elective qualified-production-property allowance add to the §167(a) deduction; they do not replace it.
Section 167(a) allows as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear, including a reasonable allowance for obsolescence, of property used in a trade or business, or of property held for the production of income. It does not set rates or periods. For most tangible property placed in service after 1986, §168 determines the amount by prescribing the method, recovery period, and convention.
Subsection (b) is a cross-reference: when §168 applies, the deduction is determined under that section. Subsection (c) sets the basis for depreciation as the adjusted basis provided in §1011 — the same figure used to measure gain on a later sale. If property is acquired subject to a lease, no part of that adjusted basis is allocated to the leasehold interest; the entire adjusted basis is taken into account for the property subject to the lease.
Bonus depreciation under §168(k) and the new qualified production property allowance under §168(n) operate as additions to the §167(a) deduction in the year property is placed in service. They do not create a separate kind of depreciable property. If an item is not of a character subject to the §167 allowance, neither MACRS nor those first-year additions apply.
Cost segregation does not change whether property is depreciable. It changes how the depreciable cost is divided among MACRS classes under §168. The two-part scope of §167(a) — business use or production of income — is also why rental property held as an investment can be depreciated even when the owner is not running an active trade or business in the §179 sense.
This page is educational information, not tax advice. Whether a particular asset is used in a trade or business, held to produce income, or used personally is a fact question for the taxpayer and the taxpayer’s CPA.
What §167 does not cover
Land is not depreciable. IRS Publication 946 lists land among property that cannot be depreciated. Property used only for personal purposes is outside both parts of §167(a). A personal residence is not depreciable while the owner lives in it. Mixed personal and business use requires an allocation; this page does not compute that split.
Property that is placed in service and disposed of in the same year generally produces no depreciation under the MACRS conventions. That same-year rule is a §168 convention issue, not a change to the §167 character of the property.
Section 167(e) disallows depreciation on certain term interests when a related person holds the remainder. That rule is about split ownership, not about buildings. It is listed here so readers do not treat every interest in real estate as automatically depreciable.
Basis and related rules in the same section
The depreciation deduction is computed on adjusted basis under §1011. Cost segregation reallocates that basis among components; it does not invent basis. If land was left in the building account, a study that later separates land is correcting the starting figure, not creating a new deduction.
Section 167(f) provides special computational rules for certain property excluded from §197, including computer software that is depreciated straight line over 36 months. Those rules sit beside MACRS. They are not a substitute for classifying building components.
Life tenants and trust or estate beneficiaries take the deduction under §167(d) according to the instrument or the income allocable to each. Ownership of the property, not the existence of a study, decides who claims the allowance.
Why it matters for cost segregation
A study starts from §167. If the building is not used in a business and is not held to produce income, splitting it into 5-year and 15-year lines does not create a deduction. The threshold question is use, not engineering detail.
Once that threshold is met, §168 assigns the method, period, and convention. The study’s work is classification: which dollars are the building, which are land improvements, and which are personal property. Those classes still rest on the same §167 allowance.
Section 179 is narrower than §167. It requires acquisition by purchase for use in the active conduct of a trade or business. A rental that qualifies for depreciation under §167(a)(2) may still fail the §179 active-conduct test. That difference belongs on the §179 page; it is noted here so the two sections are not collapsed.
Current vs. historical law
Before 1981, depreciation under §167 depended on each asset’s estimated useful life and salvage value. ACRS (1981) and MACRS (1987) replaced that with statutory recovery periods. Salvage value is treated as zero under §168(b)(4).
Older cases decided under the useful-life regime, such as Massey Motors v. United States, are historical background only. They do not assign a MACRS class to a modern building component. Labeling them as current classification authority would misstate the law.
The 2025 amendments in Public Law 119-21 did not rewrite §167(a). They added first-year allowances that flow through the same deduction. The base rule remains the reasonable allowance for exhaustion, wear and tear, and obsolescence.
Sources
- 1
- 2
- 3IRS Publication 946 — How To Depreciate Property (2025)(opens in a new tab)
Appendix B reproduces the Rev. Proc. 87-56 class lives.