Depreciation is a critical tax deduction for rental property owners, and one of the first steps in your depreciation calculations is determining the class life and recovery periods for your assets. The IRS sets the standards for asset lifespans and recovery times. If you’re new to rental property accounting, depreciation can be tricky, so getting these foundational items right is important.
That’s why we’re breaking down the key terms and guidelines for depreciation systems, class life, and recovery periods for rental property fixed assets. Bookmark this article to use as a cheat sheet when you tackle depreciation for your rental units.
Accounting Key Terms for Landlords
Let’s start by reviewing a few key terms for rental property bookkeeping:
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Accumulated depreciation: The total amount of depreciation recorded for an asset from the time it was placed in service up to the current period. This figure appears on your balance sheet, allowing you to view the net book value of an asset.
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Assets: Also known as fixed assets or capital improvements, these are physical, long-term objects used in a business’s operations. As a real estate investor, your rental property is an asset. The property itself also has assets, like the HVAC system or furnishings. These items will go on your balance sheet.
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Basis: Refers to the asset’s value used for tax purposes, particularly in calculating depreciation and capital gains. The basis differs from the purchase price, and its value changes over time.
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Class life: Also known as useful life, this is the IRS’s estimate of how long the asset is expected to be in use, on average. The IRS assigns a specific class life for each type of asset, which we’ll discuss shortly.
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Depreciation: This is a standard accounting practice that allows businesses to allocate the purchase price of an asset over the asset’s expected lifespan. Depreciation reflects the decreasing value of an asset over time.
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Depreciation expense: Noncash deductible expenses that offset an asset’s cost over a certain period. The expense goes on your profit and loss report.
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Recovery period: This refers to the number of years required to recover the asset’s cost or initial investment through depreciation. The depreciation system you use determines the recovery period.
Depreciation for Rental Property Owners
Typically, you can’t fully deduct the cost of a fixed asset in the year you buy it. But by taking a depreciation deduction, you can reclaim some of the cost over time. Your depreciation deduction helps account for the normal wear and tear and decrease in value of the asset over a specified period.
Note that the IRS has a few requirements for rental property depreciation:
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Ownership: You must own the property outright or have the mortgage for the property. Renting, leasing, or managing a property doesn’t qualify you for a depreciation deduction.
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Use: You must use the property for business or to produce income. A personal residence or vacation home primarily used by the owner doesn’t qualify for depreciation.
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Development: The property must have at least one permanent structure. Land isn’t depreciable.
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Reporting: You must report depreciation to the Internal Revenue Service (IRS) on Schedule E.
Not sure whether an expenditure counts as an asset or a repair? We’ve got you covered with our guide to remodeling deductions.
Two Depreciation Systems for Rental Property
To calculate depreciation, you need to know a few key pieces of information about your asset:
- the asset’s basis
- which depreciation system and method to use
- the asset’s class life
- the asset’s recovery period
So, what’s a depreciation system? It’s the practice that allows you to capitalize the cost of an asset and recover it over a specific period by taking annual deductions. Residential rental properties are usually depreciated using the Modified Accelerated Cost Recovery System (MACRS). MACRS has two variations:
- the general depreciation system (GDS)
- the alternative depreciation system (ADS)
You can choose either option, but once you decide, you must continue to use that system throughout the property’s useful life. Use this breakdown to confirm which system is best for your rental property.
General Depreciation System (GDS)
Most rental property owners use the GDS. It applies automatically to rental properties unless you specifically elect to use the alternative system or the IRS requires you to do so.
With GDS, residential rental property has a recovery period of 27.5 years, and you must use the straight-line depreciation method. In effect, your annual depreciation deductions will be the same each year.
For other assets within the property, like appliances or furniture, you can use accelerated depreciation methods to front-load your deductions. Options for doing so include the de minimis safe harbor election, Section 179 expensing, or bonus depreciation.
Alternative Depreciation System (ADS)
The ADS extends an asset’s useful life to 30 years (sometimes 40 years). ADS uses the straight-line method both for the property and any assets within it. So, with ADS, you’d have smaller annual deductions for a longer period. This method can be helpful if you:
- mostly own properties outside the US.
- have tax-exempt properties.
- financed a property through tax-exempt bonds.
- own a property through a real estate investment trust.
- own a property used by foreign entities not subject to US income taxes.
- use the property primarily for farming.
Remember, once you choose either GDS or ADS, you cannot change the system used for that property. Talk to your tax preparer or CPA if you think the alternative depreciation system applies to your situation.
Rental Property Asset Class Life and Recovery Periods
Use this chart as a helpful quick-reference guide for the class life and recovery periods for common rental property assets under the general depreciation system.
| Type of Asset | Class Life (in Years) | General Depreciation Recovery Period (in Years) |
|---|---|---|
| Appliances | 4–10 | 5 |
| Autos and trucks | 4–10 | 5 |
| Carpeting | 4–10 | 5 |
| Computer equipment (laptops, monitors, printers, etc.) | 4–10 | 5 |
| Doors (replace all doors) | 25+ | 27.5 |
| Driveway | 20–25 | 15 |
| Fences or retaining walls | 20–25 | 15 |
| Furniture (used in rental property) | 4–10 | 5 |
| Gutters (replace all gutters) | 25+ | 27.5 |
| HVAC | 25+ | 27.5 |
| Home office** (read note below) | 25+ | 27.5 or 39** |
| Land | Not depreciable | Not depreciable |
| Major landscaping, like trees, shrubbery, and gardens | 20–25 | 15 |
| Office furniture | 10–16 | 7 |
| Office machinery (copiers, etc.) | 4–10 | 5 |
| Residential rental property (includes structural components like furnaces, water pipes, venting, etc.) | 25+ | 27.5 |
| Roads | 20–25 | 15 |
| Roof (entire roof replaced) | 25+ | 27.5 |
| Security system hardware and installation | 4–10 | 7 |
| Sidewalks, patios, docks, drainage | 20–25 | 15 |
| Smart home devices, like thermostats, locks, and plugs | 4–10 | 5 |
| Sprinkler system | 20–25 | 15 |
| Windows (all windows replaced) | 25+ | 27.5 |
Key Points for Class Life and Recovery Periods
Home Office Depreciation
**The recovery period for your home office depends on what sort of residence you live in. For a single-family home, you’ll depreciate your home office space over 39 years because it’s nonresidential real property.
What if your apartment is part of a building you own and operate as a residential rental property? Depreciate the designated office space over 27.5 years, as residential rental property.
Assets Not Listed in the Tables
The IRS shares the class life information for common real estate assets, but it doesn’t list every option. If the asset you’re looking for isn’t listed in our table or in IRS publication 946 Appendix B, check with your CPA. Any assets without a specified class life usually have a 7-year recovery period under the GDS. Under the ADS, the recovery period is typically 12 years.
Miscalculations or Misclassified Assets
Mistakes happen. You may have missed a deduction or posted an entry in the wrong year. Maybe you want to change the amount of Section 179 you claimed (or forgot to claim), or you want to elect the de minimis safe harbor. You can amend your return to correct depreciation errors that have occurred within the last 3 years.
If the error goes back further than 3 years, you can’t “catch up” your depreciation on a current or amended return. You’ll have to wait until you sell or dispose of the asset.
Pro tip: If you made a math error on your return, don’t panic. You don’t need to submit an amended return. The IRS spots and corrects calculation errors during processing. They’ll account for adjustments to your refund or tax liability.
Skipped Depreciation or Changing Methods
What if you skipped your depreciation deductions? How you handle missed depreciation depends on how long you skipped taking the deduction.
If you missed 1 year and only 1 year has passed since you filed the return with the missing depreciation, you can simply file an amended return.
If you missed taking depreciation for 2 years, you must file IRS Form 3115. The IRS views skipping depreciation as using an incorrect method of depreciation, so if you missed taking depreciation, you can file the Application for Change in Accounting Method. You’ll attach this form to your tax return for the year of the change.
Form 3115 also applies to changing methods or conventions (such as 200% declining balance to straight-line depreciation), changing recovery periods, and changing bonus depreciation.
FAQ
Do I have to claim depreciation every year?
The IRS requires depreciation for rental properties. Even if you choose not to deduct depreciation, when you sell the property, the IRS will assume you’ve taken the deduction. You’ll still need to calculate depreciation recapture taxes.
What’s the difference between straight-line and accelerated depreciation?
Straight-line depreciation evenly distributes the expense over an asset’s life, while accelerated depreciation applies a larger expense in an asset’s early years and a smaller expense in later years.
Can I depreciate landscaping, fencing, or driveways?
Yes, you can depreciate major landscaping improvements, such as retaining walls, sidewalks, fences, or the significant installation of trees and shrubbery. However, you cannot depreciate seasonal plantings, ongoing maintenance, and pest control.
Do I need a CPA to calculate depreciation?
No, you can calculate depreciation without the assistance of a CPA.
Can I change depreciation systems later on?
No, you cannot switch between the general and alternative depreciation systems. Once you choose a system, you must keep using it for that property.
Is land ever depreciable?
No, land isn’t considered depreciable because it doesn’t have a finite usable lifespan. The IRS assumes land will hold or increase its value over time, unlike machinery or buildings, which you can depreciate.
