Depreciable Property: Tests, Categories, and Recapture

Depreciable property is any asset you own and use in a trade, business, or income-producing activity that has a determinable useful life longer than one year. Federal tax law lets you recover its cost through annual deductions instead of writing off the full price at purchase. The core rules sit in Internal Revenue Code Sections 167, 168, and 179, with the mechanics laid out in IRS Publication 946.

The Three Tests an Asset Must Pass

An asset qualifies for depreciation only when all three of these are true.

You must own it, or bear the economic risks and rewards of ownership. Leased property generally belongs to the lessor for depreciation purposes, though certain capital leases shift that right to the lessee.

It must be used in a trade or business or held for the production of income. A rental house qualifies. A boat you take out on weekends does not, no matter what it cost. The line is a genuine profit motive, not occasional income.¹

It must have a determinable useful life extending beyond the tax year you acquire it. The asset has to be the kind of thing that wears out, decays, or becomes obsolete. Physical deterioration or technological obsolescence is what the IRS looks for.²

What You Cannot Depreciate

Several categories are flatly excluded, and confusing these for qualifying property is one of the faster ways to invite IRS attention.

Land. It doesn’t wear out or get used up. When you buy a building, you must separate land value from structure value and exclude the land from your depreciable basis.
Inventory. Products held for sale are recovered through cost of goods sold when they sell, not depreciated.
Personal-use property. A car used only for commuting, your home, furniture in your residence. Self-employment status doesn’t change this.
Same-year dispositions. If you buy and dispose of an asset within the same tax year, it cannot be depreciated at all.

Categories and How Long the Cost Is Spread

Tangible Personal Property

Physical items you can move: machinery, vehicles, computers, office furniture, tools. Under the Modified Accelerated Cost Recovery System (MACRS), each type falls into a recovery class that sets the number of years you deduct over. The two classes most small businesses see:

5-year property: automobiles, taxis, buses, trucks, copiers, calculators, computers, and research equipment.
7-year property: office furniture and fixtures such as desks, filing cabinets, and safes, plus any property that has no assigned class life under IRS tables.

Agricultural equipment, specialized manufacturing tools, and racehorses each have their own recovery periods in the tax code.²

Real Property

Buildings run on much longer clocks. Residential rental property uses a 27.5-year recovery period. Nonresidential real property (offices, warehouses, retail) uses 39 years. Both use straight-line depreciation, so the annual deduction is roughly even across the recovery period.²

Remember to strip out the land. A professional appraisal or the property tax assessment breakdown can support the allocation, and the IRS expects documentation for whatever split you use.

Intangible Assets

Some non-physical assets are recovered through amortization rather than depreciation, though the annual-deduction effect is the same. Under IRC Section 197, intangibles acquired as part of a business purchase are amortized over 15 years. That covers goodwill, going concern value, customer lists, trademarks, franchises, patents, and non-compete agreements.³

Off-the-shelf software used internally is treated as 3-year property under Section 167.¹

Figuring the Depreciable Basis

The depreciable basis is the dollar amount you’ll recover over time. It starts with what you paid: purchase price plus sales tax, delivery, installation, and any other costs required to get the asset ready for use. Keep the closing statements and vendor invoices; they’re the documentation you’ll need if the number is ever questioned. The total is reported on IRS Form 4562.⁴

For real estate, subtract the allocated land value first. Only the building and its structural components go into the basis.

Improvements Get Capitalized, Repairs Get Deducted

What you spend after purchase either adds to the depreciable basis or comes off this year’s return as an expense. That distinction matters: capitalizing a $30,000 roof replacement spreads the deduction across decades, while writing off a $2,000 patch job hits the current year in full.

Under the IRS tangible property regulations, you capitalize costs that produce a betterment (materially increasing productivity, efficiency, or capacity), a restoration (replacing a major component or bringing a non-functional asset back to working condition), or an adaptation to a new or different use. Routine maintenance that keeps property in ordinary operating condition is deductible when paid.⁵

The De Minimis Safe Harbor

Not every business purchase needs to run through depreciation. The de minimis safe harbor election lets you immediately deduct tangible property below a per-item threshold. Businesses with an applicable financial statement (audited financials) can use $5,000 per item or invoice. Everyone else uses $2,500 per item or invoice. You have to expense the same amounts on your books and records to qualify.⁵

Faster Write-Offs: Section 179 and Bonus Depreciation

Section 179 Expensing

Section 179 lets you deduct the full cost of qualifying property in the year you place it in service instead of spreading it out. For 2026, the maximum deduction is $2,560,000. It phases out dollar-for-dollar once total Section 179 property placed in service during the year exceeds $4,090,000, and it disappears entirely at $6,650,000.⁶

Most tangible personal property used in business qualifies, and both new and used equipment count. SUVs rated above 6,000 pounds are capped at $32,000 for Section 179. The deduction cannot exceed your taxable business income for the year, but unused amounts carry forward.

Bonus Depreciation

Bonus depreciation is an additional first-year deduction that can be taken on top of or instead of regular MACRS depreciation. Under the One Big Beautiful Bill Act, 100% bonus depreciation is now permanent for qualified property acquired after January 19, 2025. Eligible assets can be written off entirely in year one, with no dollar cap.⁷

Unlike Section 179, bonus depreciation isn’t limited by taxable income, so it can create or increase a net operating loss. New and used property both qualify, provided the used property wasn’t previously used by the same taxpayer, wasn’t acquired from a related party, and meets the other acquisition requirements.⁸

You can elect out for any class of property. Businesses expecting higher income in later years sometimes prefer to spread the deductions.

Listed Property and Vehicle Caps

Some assets are prone to personal use even when nominally for business. The IRS calls these “listed property,” and passenger automobiles are the textbook case. If listed property isn’t used more than 50% for qualified business purposes, you lose accelerated depreciation, Section 179 expensing, and bonus depreciation for that asset. You’re limited to straight-line under the longer Alternative Depreciation System recovery period.²

If business use later drops below 50% after you’ve claimed accelerated deductions, you have to recapture the excess and report it as income. Contemporaneous mileage logs and usage records are what the IRS expects to see.

Passenger automobiles also face annual dollar caps regardless of what the vehicle cost. For cars placed in service in 2026, the first-year limit with bonus depreciation is $20,300. Without bonus depreciation, the first-year limit is $12,300. Later years: $19,800 in year two, $11,900 in year three, and $7,160 for each following year until the cost is fully recovered.⁹

When Depreciation Begins and Ends

Depreciation starts when property is “placed in service,” meaning ready and available for its intended function. A machine that’s delivered, installed, and tested is placed in service even before you push the first unit through it.⁴

Deductions stop when one of two things happens: you’ve fully recovered the basis, or the property is permanently retired through sale, trade-in, abandonment, or destruction. If you dispose of it before the basis is fully recovered, the undepreciated amount factors into your gain or loss on the sale.

Depreciation Recapture When You Sell

Every dollar of depreciation you claim reduces your adjusted basis. When you later sell at a gain, the IRS takes back some of the tax benefit through recapture, and the rules split by asset type.

For tangible personal property (equipment, vehicles, machinery), Section 1245 treats gain as ordinary income up to the total depreciation you claimed. Buy a $50,000 machine, depreciate $30,000, sell for $45,000: the $25,000 gain is ordinary income because it falls within the $30,000 depreciation amount. Gain beyond the depreciation figure would be long-term capital gain.¹⁰

Real property runs on different rules. Depreciation claimed on buildings is subject to “unrecaptured Section 1250 gain,” taxed at a maximum rate of 25%. That’s higher than the standard long-term capital gains rate but below ordinary income rates for most taxpayers.¹¹

One thing to know before deciding to “just skip” depreciation on a rental: recapture applies to depreciation “allowed or allowable.” The IRS calculates it based on what you should have taken, whether you took it or not. Not claiming the deductions doesn’t get you out of recapture when you sell.

1
Office of the Law Revision Counsel. 26 USC 167 – Depreciation
2
Internal Revenue Service. Publication 946, How To Depreciate Property
3
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
4
Internal Revenue Service. Depreciation Reminders
5
Internal Revenue Service. Tangible Property Final Regulations
6
Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets
7
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
8
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
9
Internal Revenue Service. Rev. Proc. 2026-15
10
Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets
11
Internal Revenue Service. Topic No. 409, Capital Gains and Losses