A business generally cannot write off a property purchase in the year it buys the building. The IRS treats real estate as a capital expenditure, so the cost of the building is recovered gradually through depreciation, and the cost allocated to land is not recovered at all until you sell. That said, several provisions let you accelerate parts of the write-off, and many costs tied to owning the property (mortgage interest, property taxes, repairs, insurance) are fully deductible in the year you pay them.
Here is how the pieces fit together.
Why the Purchase Price Isn’t Deductible All at Once
A property purchase is a capital investment, not an operating expense. The tax code requires you to establish a cost basis for the property and then recover that basis over the years the property is used in the business.
Your cost basis starts with the purchase price and picks up the settlement costs that go with the transaction. IRS Publication 551 lists these as abstract fees, legal fees for title searches and deed preparation, recording fees, surveys, transfer taxes, owner’s title insurance, and charges for installing utility services. Seller debts you agree to pay, such as back taxes or sales commissions, also roll into basis.1Internal Revenue Service. Publication 551, Basis of Assets
You then split that total between land and building. Land is not depreciable, so only the building portion produces annual deductions. Most businesses do the split using the local property tax assessment, which already carries separate values for land and improvements. A professional appraisal is the better path when the assessment looks off.
Depreciating the Building
The Modified Accelerated Cost Recovery System (MACRS) governs depreciation for real property placed in service after 1986.2Internal Revenue Service. Topic No. 704, Depreciation Two recovery periods apply, depending on how you use the property:
- Nonresidential real property (offices, warehouses, retail): 39 years
- Residential rental property (apartments, rental houses): 27.5 years
Both use the straight-line method, so the annual deduction is the same across the full recovery period.3Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System Both also apply the mid-month convention, which treats the property as placed in service in the middle of the closing month regardless of the exact date. Your first-year deduction is prorated based on how many months remain after that midpoint.4Internal Revenue Service. Publication 946, How to Depreciate Property
A quick illustration. Buy a commercial building with a $1 million building basis and close in March. The full annual deduction is about $25,641 ($1 million รท 39). Year one gives you credit for roughly 9.5 months, so the first deduction runs about $24,359. Every full year after that produces the standard $25,641, and the balance clears in year 39. Depreciation is reported annually on Form 4562.5Internal Revenue Service. About Form 4562, Depreciation and Amortization
Ways to Speed Up Parts of the Write-Off
Thirty-nine years is a long time to wait. Several strategies pull portions of the cost into much shorter recovery periods, and some into the first year outright. None of them shorten the recovery period for the building shell itself, but together they can make a meaningful dent in the tax bill soon after purchase.
Cost Segregation
A cost segregation study has an engineer or tax professional walk the property and reclassify individual components out of the 39-year building category. Carpeting, decorative lighting, specialized plumbing, and certain electrical systems can qualify as personal property with a 5-year or 7-year recovery period. Parking lots, sidewalks, fences, and landscaping move to a 15-year land improvement class.4Internal Revenue Service. Publication 946, How to Depreciate Property The reclassified components can then be eligible for bonus depreciation or Section 179 expensing.
Studies typically cost $5,000 to $15,000 and pencil out most clearly on properties worth $1 million or more. The IRS has published audit techniques guidance on cost segregation, so it is a recognized planning tool rather than an aggressive position.
Qualified Improvement Property
Qualified Improvement Property (QIP) is a statutory category for interior improvements to a nonresidential building made after the building was first placed in service. Enlargements, elevators and escalators, and changes to the internal structural framework are excluded.3Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System QIP has a 15-year MACRS recovery period, cutting more than half off the standard schedule for things like new flooring, updated lighting, reconfigured office walls, and other tenant improvements.
One boundary worth noting: you cannot buy a building and treat improvements a prior owner made as QIP. Only improvements you make after acquiring the building qualify.6The Tax Adviser. Qualified Improvement Property and Bonus Depreciation
Section 179 Expensing
Section 179 allows a business to deduct the full cost of qualifying property in the year it is placed in service, up to an annual dollar cap. For 2026, the maximum deduction is approximately $2,560,000, with a phase-out beginning when total qualifying property purchases exceed roughly $4,090,000 for the year. The thresholds adjust annually for inflation.
Qualifying real property under Section 179 includes QIP plus improvements to roofs, HVAC systems, fire protection and alarm systems, and security systems installed in nonresidential buildings.7Internal Revenue Service. Depreciation Expense Helps Business Owners Keep More Money One advantage over bonus depreciation is elective flexibility: you can take a partial Section 179 deduction to manage the current year’s tax bracket.
Bonus Depreciation
Bonus depreciation is a fixed percentage of the asset’s cost, deducted in the first year. The Tax Cuts and Jobs Act had it stepping down (80% in 2023, 60% in 2024, 40% in 2025), but 2025 legislation restored the rate to a permanent 100% for qualified property acquired after January 19, 2025.8Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
For property placed in service in 2026, QIP and other qualifying assets with recovery periods of 20 years or less can be deducted in full in year one. The building shell still does not qualify because its 39-year life exceeds the 20-year cutoff. Both Section 179 and bonus depreciation are elected on Form 4562 in the year the property is placed in service.5Internal Revenue Service. About Form 4562, Depreciation and Amortization
What You Can Deduct Immediately
Depreciation is the slow part of the write-off. Around it, a stack of ownership and operating costs is fully deductible in the year you pay them, and these often outweigh depreciation in the early years of ownership.
Mortgage Interest
Interest on a loan used to acquire or improve business property is a deductible business expense. In the early years of a commercial mortgage, when most of each payment is interest, this deduction is substantial. Businesses with average annual gross receipts above $32 million (for tax years beginning in 2026) run into a cap: business interest cannot exceed 30% of adjusted taxable income, plus business interest income and floor plan financing interest.9Office of the Law Revision Counsel. 26 U.S. Code 163 – Interest Businesses under that gross receipts threshold are not subject to the cap.
Property Taxes and Operating Costs
State and local property taxes on business real estate are deductible in the year paid.10Office of the Law Revision Counsel. 26 U.S. Code 164 – Taxes The $10,000 SALT cap that applies to individuals does not apply to property used in a trade or business.
Property insurance premiums, utilities, property management fees, janitorial and security services, and advertising to lease vacant space are also fully deductible in the year incurred. They keep the business running without adding lasting value to the building.
Repairs vs. Improvements
Ordinary repairs that keep the property in its current working condition come off in the year you pay for them. Patching a leaky section of roof, repainting interior walls, and replacing a broken window all qualify. Work that adds value, substantially extends the building’s life, or adapts it to a new use has to be capitalized and depreciated.11Internal Revenue Service. Tangible Property Final Regulations Replacing an entire HVAC system, putting on a new roof, or adding square footage are improvements. The line between repair and improvement is one of the more common audit issues for commercial owners.
Two safe harbors help on the margin. The de minimis safe harbor lets you immediately expense low-cost items that would otherwise be capitalized: up to $5,000 per item if your business has audited financial statements, or $2,500 per item or invoice if it does not. You need a written accounting policy in place at the start of the tax year to use it. The routine maintenance safe harbor covers recurring upkeep you reasonably expect to perform more than once during the building’s class life, such as periodic roof section replacement inside a 39-year window.11Internal Revenue Service. Tangible Property Final Regulations
What Depreciation Costs You When You Sell
Every depreciation deduction reduces the property’s adjusted basis. When you sell, the lower basis produces a larger taxable gain. Start with your original cost basis, subtract all depreciation claimed, and you have the adjusted basis. Sale price minus adjusted basis is your gain or loss.
The portion of that gain equal to the total depreciation you claimed is “unrecaptured Section 1250 gain,” taxed at a maximum rate of 25%. Any additional gain above your original cost basis is taxed at long-term capital gains rates, which top out at 20%.12Internal Revenue Service. Topic No. 409, Capital Gains and Losses
A concrete version: buy for $800,000, claim $200,000 of depreciation (adjusted basis $600,000), sell for $1 million. Total gain is $400,000. The first $200,000, matching the depreciation taken, faces up to 25%. The other $200,000 is taxed at the applicable capital gains rate.
Deferring the Gain With a 1031 Exchange
If you are reinvesting in another property, a Section 1031 like-kind exchange defers the entire gain, including depreciation recapture. Real estate is treated broadly as like-kind, so an office building can be exchanged for a warehouse, vacant land, or a retail property.
The deadlines are strict. You must identify replacement properties within 45 days of transferring the old property and close on the replacement within 180 days (or by your tax return due date, whichever is earlier).13Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment Miss either date and the exchange fails, leaving the full gain taxable. In most exchanges involving separate buyers and sellers, a qualified intermediary holds the sale proceeds; if you touch the funds during the exchange period, the IRS treats it as a taxable sale.