Land Improvements: 15-Year MACRS Rules and Bonus Depreciation

Parking lots, fences, sidewalks, private roads, drainage systems, retaining walls, and landscaping tied to a building are recovered as 15-year land improvements under MACRS, using the 150% declining balance method.¹ Land itself never depreciates because it doesn’t wear out, but physical additions to it do, and the tax code lets you recover their cost through annual deductions.² For property placed in service after January 19, 2025, you can also deduct the full cost in year one under restored 100% bonus depreciation.³

What Counts as a 15-Year Land Improvement

IRC Section 168(e) places property with a class life of 20 or more but less than 25 years into the 15-year MACRS category.⁴ IRS Publication 946 lists the common examples: shrubbery, fences, roads, sidewalks, and bridges.¹ Paved parking areas, drainage facilities, and retaining walls also qualify.

Landscaping and shrubbery deserve their own note. They count as 15-year property only when they’re closely tied to a building. The practical test: would the landscaping have to be destroyed if the building were replaced? If yes, it’s a depreciable improvement. If no, it’s part of the land.

What Does Not Qualify

Raw land is never depreciable. Costs to prepare land for use, including clearing, grading, and leveling, get added to the land’s cost basis rather than recovered through depreciation, because they provide a permanent benefit that stays with the property.¹

Building structures and their integrated components also sit outside this class. HVAC, plumbing, and electrical wiring are structural components of the building. Residential rental buildings use a 27.5-year recovery period, and nonresidential commercial buildings use 39 years.¹ Pulling a 39-year building component into the 15-year class accelerates deductions the IRS hasn’t authorized and can draw a 20% accuracy-related penalty on any resulting underpayment.⁵

Is It a Repair or a Capital Improvement

Before you depreciate anything, you have to decide whether the expenditure creates a new asset at all. Routine repairs are deducted in full in the year you pay them. Capital improvements have to be capitalized and depreciated. The IRS applies three tests under the tangible property regulations: an expenditure is a capital improvement if it produces a betterment, a restoration, or an adaptation to a new use.⁶

A betterment is a material addition or upgrade. Filling potholes is a repair; regrading and repaving the whole parking lot is a betterment. A restoration replaces a major component, like tearing out and replacing an entire fence line rather than patching a section. Adapting means changing what the asset does, such as converting a gravel storage yard into a paved customer lot. If none of the three tests applies, the cost is a current-year deduction. If any one applies, it enters the 15-year schedule.

How the 15-Year Calculation Works

Under the General Depreciation System, 15-year land improvements use the 150% declining balance method, switching to straight-line in the first year that straight-line produces a larger deduction.¹ Declining balance front-loads the recovery, so more of the cost comes back in the early years.

You also apply a convention that determines how much depreciation you get in the placed-in-service year. The default half-year convention treats every asset as placed in service at the midpoint of the year regardless of the actual date. The mid-quarter convention overrides that rule when more than 40% of the total cost of property placed in service during the year lands in the fourth quarter. Under mid-quarter, each asset is treated as placed in service at the midpoint of its actual quarter, which can meaningfully cut your first-year deduction on a large late-year purchase.

Bonus Depreciation Under the OBBBA

The One, Big, Beautiful Bill Act, signed on July 4, 2025, restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025.³ Because 15-year land improvements have a recovery period of 20 years or less, they qualify. A $200,000 parking lot placed in service in 2026 can be deducted in full that year instead of spread across 15.

The change is permanent. Before the OBBBA, bonus depreciation had been phasing down annually toward 0% by 2027. The new law eliminates that phasedown for property acquired after January 19, 2025.³ The property must be depreciable MACRS property, and the original use must begin with you (or it must be qualifying used property under the separate acquisition rules). You can elect out on a class-by-class basis if you’d rather spread the deductions.

Section 179 Does Not Apply

Owners sometimes assume they can expense a new parking lot or fence under a Section 179 election. They can’t. The IRS excludes land and land improvements from Section 179, and the exclusion specifically lists swimming pools, paved parking areas, docks, bridges, and fences.¹ Bonus depreciation is the mechanism for expensing land improvements up front, not Section 179.

Cost Segregation to Pull Out 15-Year Assets

When you buy or build a commercial property, the price is usually one lump sum sitting in a 39-year (or 27.5-year) recovery period. A cost segregation study breaks that total into components and reclassifies items like parking lots, sidewalks, landscaping, and site drainage into the 15-year class, where they can qualify for 100% bonus depreciation.

The IRS publishes an audit techniques guide on cost segregation, so the quality of the analysis matters. A credible study typically involves an engineer or qualified professional who inspects the property, reviews blueprints and construction invoices, allocates costs to individual components, and produces a detailed report supporting each reclassification. Professional fees generally run $5,000 to $15,000 for standard commercial properties. A study can also be run on a property you’ve held for years, with the reclassified depreciation caught up in a single year through the mechanism below.

Fixing Depreciation You Missed in Prior Years

If you failed to claim depreciation on a land improvement in an earlier year, you cannot fix it with an amended return. The IRS requires Form 3115, Application for Change in Accounting Method, to switch from the incorrect method (not depreciating) to the correct one. For property still in use, this is automatic change number 7. For property already disposed of, it’s change number 107.

This is an automatic approval change, so you don’t need permission or a user fee. You calculate the total depreciation you should have claimed, subtract what you actually claimed, and deduct the entire difference as a Section 481(a) adjustment in the year of change. File the original Form 3115 with your return for the year of change by the due date, including extensions. This same mechanism lets you catch up reclassified depreciation from a cost segregation study on a property you’ve owned for years.

Recapture When You Sell

Depreciation gives you a benefit while you hold the property; the IRS collects some of it back at sale. Gain attributable to previously claimed depreciation on Section 1250 property (unrecaptured Section 1250 gain) faces a maximum federal rate of 25%.⁷

The treatment turns on whether the improvement is Section 1245 or Section 1250 property. Section 1245 covers tangible property (other than buildings) used as an integral part of activities like manufacturing, production, and transportation services. When a land improvement is Section 1245 property, all previously claimed depreciation is recaptured as ordinary income up to the amount of gain. Section 1250 covers depreciable real property that isn’t Section 1245; for those assets, only “additional depreciation” (the amount exceeding what straight-line would have produced) is recaptured as ordinary income.⁸

If you claim 100% bonus depreciation and sell the property a few years later at a gain, expect a meaningful recapture bill. That doesn’t necessarily make bonus depreciation a bad move; the time value of the upfront deduction typically outweighs the eventual recapture. But if a sale is on the horizon, run the numbers before electing.

Filing on Form 4562

Depreciation for land improvements goes on Form 4562, Depreciation and Amortization.⁹ For each asset you need three inputs: cost basis (materials, labor, and installation), placed-in-service date (when the asset was ready and available for use), and convention (half-year or mid-quarter). Cost basis enters the 15-year property column, unless you’re claiming bonus depreciation, in which case the full amount goes in the bonus section.

Form 4562 attaches to your primary return. Sole proprietors attach it to Schedule C of Form 1040.¹⁰ Corporations file it with Form 1120.¹¹ Partnerships and S corporations attach it to their respective returns.

How Long to Keep the Records

The three-year retention rule that covers most tax documents isn’t enough for depreciable property. The IRS requires records related to property to be kept until the statute of limitations expires for the tax year in which you dispose of the asset.¹² For a 15-year land improvement placed in service at the start of its life, that can mean 18 years or more of retention.

Keep the original purchase invoices, contractor agreements, proof of payment, and documentation of the placed-in-service date. If you commissioned a cost segregation study, hold onto the full report and workpapers. Without those records at audit, the IRS can disallow the entire depreciation deduction because you can’t substantiate the basis and classification.

1
Internal Revenue Service. Publication 946 – How To Depreciate Property
2
Internal Revenue Service. Topic No. 704, Depreciation
3
Internal Revenue Service. Notice 2026-11 – Interim Guidance on Additional First Year Depreciation Deduction Under Section 168(k)
4
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
5
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
6
Internal Revenue Service. Tangible Property Final Regulations
7
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
8
Internal Revenue Service. Publication 544 – Sales and Other Dispositions of Assets
9
Internal Revenue Service. About Form 4562, Depreciation and Amortization
10
Internal Revenue Service. Instructions for Schedule C (Form 1040)
11
Internal Revenue Service. Instructions for Form 1120 (2025)
12
Internal Revenue Service. How Long Should I Keep Records