Do Buildings Depreciate? Recovery Periods, Recapture, and Reporting

Yes, buildings do depreciate for federal tax purposes. The IRS treats a building used in a trade, business, or rental activity as property that wears out over time, and lets the owner deduct a portion of its cost each year — 27.5 years for residential rental property and 39 years for nonresidential (commercial) property.¹ The deductions reduce taxable income while you own the property, but the rules on what you can depreciate, when the clock starts, and what happens at sale are strict.

Land Is Not Depreciable

Federal tax law allows depreciation only for property that wears out, decays, or becomes obsolete over time.² Land does not qualify because it has no determinable useful life. The ground beneath the structure does not get used up.

When you buy real estate, you have to split the purchase price between land and building. Only the amount allocated to the building becomes your depreciable basis. Owners typically use the local property tax assessment, an independent appraisal, or the relative fair market values at the time of purchase to make the split. If you pay $600,000 for a property and the land accounts for 20 percent of the value, your depreciable building basis is $480,000. Keep documentation supporting the allocation; the IRS can challenge it on audit.

Certain improvements to the land itself, as opposed to the building, do get their own depreciation schedule. Shrubbery, fences, roads, sidewalks, and bridges are classified as 15-year property under MACRS.³ These are separate from the building and recover much faster.

Residential vs. Nonresidential Recovery Periods

The Modified Accelerated Cost Recovery System (MACRS) sets the recovery period based on how the building is used:

Residential rental property depreciates over 27.5 years. A building qualifies when at least 80 percent of its gross rental income comes from dwelling units. Apartments, duplexes, and single-family rentals fall here.
Nonresidential real property depreciates over 39 years. This covers office buildings, retail space, warehouses, and other business structures that do not meet the residential threshold.

Both categories must use the straight-line method. The law does not permit accelerated methods like the 200-percent declining balance for real property.¹ The timelines are fixed by statute. A residential rental that will physically last 60 years still depreciates over 27.5. A well-built office still uses 39.

How the Annual Deduction Is Calculated

Straight-line depreciation is simple arithmetic: divide the depreciable basis by the recovery period. A residential rental with a $275,000 building basis produces a $10,000 annual deduction. A commercial building with a $390,000 basis produces roughly the same.³

Real property uses a mid-month convention. Whatever day of the month you place the building in service, the IRS treats it as placed in service at the midpoint. You get half a month of depreciation for the acquisition month, plus full months through the end of the year.³ Place a nonresidential building in service in January and you receive 11.5 months of depreciation that first year. The same rule runs in reverse at sale: you get depreciation through the midpoint of the disposition month.

When the Clock Starts

Depreciation begins when the building is placed in service, meaning ready and available for its intended use. For a rental, that is the date it is available for rent, not the date a tenant signs. Buy a house in April, renovate through June, list it for rent in July, and depreciation starts in July. You cannot depreciate a building while it is under construction or torn up for renovations that make it unusable. Depreciation stops when you have recovered your basis or permanently retired the property, whichever comes first.⁴

Converting a Home to a Rental

If you move out and rent your former home, the depreciable basis is not simply what you paid. You use the lesser of the property’s fair market value on the conversion date or your adjusted basis (original cost plus improvements, minus any casualty loss deductions).⁴ The rule prevents inflating the depreciable amount when values have dropped. The 27.5-year clock then starts the month the property is available for rent.⁵

Repairs vs. Capital Improvements

Not everything you spend on a building gets depreciated. The IRS separates repairs (deducted in the current year) from capital improvements (added to basis and depreciated). A cost is a capital improvement if it meets any one of three tests:⁶

Betterment: the work fixes a pre-existing defect, adds materially to the structure, or significantly increases capacity, efficiency, or output.
Restoration: the work replaces a major component or substantial structural part, or restores damage for which you already claimed a casualty loss.
Adaptation: the work converts the building to a new or different use, such as turning a warehouse into retail space.

Patching drywall, fixing a leaky faucet, and repainting are ordinarily deductible repairs. Replacing a full roof or installing a new HVAC system is a capital improvement.

A safe harbor lets you skip depreciation for smaller items. Without audited financial statements, you can expense items costing up to $2,500 per invoice or per item; with an applicable financial statement, the limit rises to $5,000.⁶ The election is made annually on the return.

Ways to Accelerate the Deduction

The 27.5- and 39-year timelines are long. Several tools let owners front-load deductions.

Cost Segregation

A cost segregation study reclassifies components of a building into shorter MACRS categories, typically 5-year, 7-year, or 15-year property. Carpeting, decorative light fixtures, removable partitions, specialized electrical wiring, and dedicated plumbing connections are common candidates.⁷ The building shell itself stays on its long schedule; the reclassified pieces move to faster ones.

Qualified Improvement Property

Interior improvements to a nonresidential building, made after the building’s original in-service date, can qualify as qualified improvement property (QIP) with a 15-year recovery period rather than 39.¹ QIP covers interior walls, flooring, ceilings, and lighting. It excludes building enlargements, elevators, escalators, and changes to the internal structural framework.⁸ The improvement must be made by the taxpayer; you cannot buy a building and treat the seller’s renovations as QIP.

Bonus Depreciation

Under the One, Big, Beautiful Bill Act, property placed in service after January 19, 2025, qualifies for 100-percent bonus depreciation.⁹ Shorter-lived components identified through cost segregation, and QIP, can be written off in the first year. The 27.5- or 39-year building shell does not qualify, but the reclassified components do.¹⁰

Section 179

Certain nonresidential building improvements can be expensed under Section 179: roofs, HVAC, fire protection and alarm systems, and security systems. For 2025, the maximum deduction was $2,500,000, phasing out once qualifying property placed in service exceeded $4,000,000.¹¹ Section 179 requires active trade or business use, and the deduction cannot exceed business income for the year.

Recapture When You Sell

Every deduction you take reduces your basis, and the IRS reclaims part of the benefit at sale. Total depreciation claimed (or that you were entitled to claim) becomes unrecaptured Section 1250 gain, taxed at a maximum federal rate of 25 percent — higher than the long-term capital gains rate on the rest of the profit.¹²

An example. You buy a rental for $400,000, allocate $320,000 to the building, and claim $80,000 in depreciation over your holding period. Your adjusted basis drops to $240,000 (building basis minus depreciation, plus land). Sell for $500,000 and your gain is $260,000. The first $80,000 is taxed at up to 25 percent; the rest is long-term capital gain.¹³

The Allowed-or-Allowable Trap

Skipping depreciation does not protect you. The IRS reduces your basis by the greater of the depreciation you actually claimed (allowed) or the depreciation you could have claimed (allowable).³ You lose the annual tax savings and still owe recapture on the phantom depreciation at sale. If you have missed depreciation on past returns, you may be able to fix it by filing an amended return or requesting a change in accounting method.

Where to Report It

Building depreciation is reported on IRS Form 4562. For property placed in service during the current tax year, you list the classification, the month and year placed in service, the depreciable basis, the recovery period, the convention (mid-month for real property), the method (straight-line), and the calculated deduction.¹¹ For prior-year property, you do not resubmit the details, but you must keep the underlying records — basis, method, placed-in-service date, and recovery period — in your permanent files. Using the wrong recovery period or method can trigger accuracy-related penalties under 26 U.S.C. § 6662.¹⁴

1
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
2
Office of the Law Revision Counsel. 26 USC 167 – Depreciation
3
Internal Revenue Service. Publication 946 (2024), How To Depreciate Property
4
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
5
eCFR. 26 CFR 1.168(i)-4 – Changes in Use
6
Internal Revenue Service. Tangible Property Final Regulations
7
Internal Revenue Service. Cost Segregation Audit Technique Guide
8
Legal Information Institute. 26 USC 168(e)(6) – Qualified Improvement Property
9
Internal Revenue Service. One, Big, Beautiful Bill Provisions
10
Internal Revenue Service. Interim Guidance on Additional First Year Depreciation Deduction Under Section 168(k)
11
Internal Revenue Service. Instructions for Form 4562 (2025)
12
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
13
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
14
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty