If you buy a piece of property used in your business or a rental, the tax code does not let you deduct the whole cost the day you buy it. Instead it lets you deduct a piece of it each year over the property’s “recovery period.” That is depreciation. It is bookkeeping that has a real cash value, sometimes a very large one.
Recovery periods
The IRS sorts depreciable property into classes:
- 5-year: computers, cars, light trucks, most office equipment
- 7-year: office furniture and fixtures, most farm equipment
- 15-year: land improvements (parking lots, fencing, sidewalks), qualified improvement property
- 27.5-year: residential rental buildings
- 39-year: commercial buildings
Land itself does not depreciate (it does not wear out). Inventory does not depreciate (it is held for sale). Personal-use property does not depreciate (the IRS isn’t subsidizing your couch).
Methods
For most personal property (5- and 7-year), the IRS uses an accelerated method called 200% declining balance. It front-loads the deduction. For land improvements (15- and 20-year), it uses 150% declining balance. For buildings (27.5- and 39-year), it uses straight-line, the deduction is the same every year.
Conventions
The convention tells you when, in the year, the property is treated as placed in service.
- Half-year: all personal property is treated as placed in service in the middle of the year, regardless of the actual date.
- Mid-quarter: if more than 40% of the year’s personal-property purchases happened in the last quarter, the IRS switches everyone to a per-quarter mid-point. This is a trap that catches end-of-year buyers off guard.
- Mid-month: all buildings use mid-month. The deduction in year one is prorated by the month you bought it.
Bonus depreciation and § 179
Two tools front-load even more deduction into year one. Bonus depreciation lets you deduct a percentage of the cost of qualifying property in the first year. From 2017-2022 it was 100%. It is now phasing down (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027 unless Congress extends it). § 179 expensing is similar but has dollar caps and an income limit, and it is elected per-asset.
For most buyers, bonus is the default because it is automatic. § 179 is useful in years where you want to control which assets go on the return and which carry over.
When does depreciation start
The day the property is “placed in service” — ready and available for use. Not the day you sign the contract; not the day the check clears. The day the asset is ready to do its job. For a rental, that’s the day it’s ready for tenants. For equipment, the day it is set up and operational.
Selling later: recapture
Depreciation is not free money. When you sell the property later, the IRS takes back some of the benefit through depreciation recapture (covered in the depreciation recapture article). This is why the planning conversation always includes: what is your exit?