Renovation Depreciation Life and Recovery Periods

Renovation depreciation life depends on what you renovated and how the building is used. Structural work on a residential rental building depreciates over 27.5 years. Structural work on a commercial building depreciates over 39 years. Interior improvements to an already-in-service commercial building, if they qualify as qualified improvement property (QIP), drop to a 15-year life, and site work like parking lots, fences, and landscaping is also 15-year property. For projects placed in service after January 19, 2025, QIP and 15-year land improvements can be written off entirely in the first year under restored 100% bonus depreciation.

The 27.5-Year and 39-Year Default Lives

Any capital improvement to a building takes the same property class and recovery period the building itself would get if placed in service on the day the improvement was finished.

Residential rental property uses a 27.5-year life. A building qualifies as residential rental if 80% or more of its gross rental income comes from dwelling units. Apartment buildings, duplexes, and single-family rentals that meet this threshold depreciate over 27.5 years using the straight-line method and the mid-month convention.

Nonresidential real property uses a 39-year life. That covers offices, retail stores, warehouses, and any rental building where less than 80% of gross rental income comes from dwelling units. The method is also straight-line with the mid-month convention, but the longer period produces much smaller annual deductions.

These long lives apply to the building’s structural components: walls, floors, ceilings, roofing, plumbing, electrical wiring, and HVAC systems. If your renovation is a gut remodel of an apartment, a new roof on a warehouse, or a full HVAC replacement, you’re almost certainly in 27.5-year or 39-year territory unless a shorter-life category below rescues some of the cost.

15-Year Categories That Beat the Default

Qualified Improvement Property

Qualified improvement property is the most valuable classification a commercial interior renovation can land in. QIP covers any improvement made to the interior of a nonresidential building that is already in service, with three carve-outs: enlargements of the building, elevators or escalators, and changes to the building’s internal structural framework. New interior walls, lighting, flooring, ceiling grids, and non-structural electrical or plumbing upgrades typically qualify.

QIP gets a 15-year MACRS recovery period instead of 39. More importantly, because its life is 20 years or less, QIP is eligible for bonus depreciation.

One boundary worth stating plainly: QIP does not apply to residential rental property. Interior work on an apartment building still depreciates over 27.5 years unless specific components can be reclassified as personal property through a cost segregation study.

Land Improvements

Land itself never depreciates. Improvements to the land do, and most of them land in the 15-year class:

Fences and retaining walls
Sidewalks and pathways
Roads and driveways
Parking lots and paving
Landscaping
Septic systems and drainage
Outdoor lighting

These assets use the 150% declining balance method, switching to straight-line when that produces a larger deduction, with the half-year convention by default. Because they’re 20-year-or-less property, they also qualify for bonus depreciation.

If a renovation project mixes building work with site work, separating the costs matters. Lumping parking lot repaving into a 39-year building basis means giving up more than half the recovery speed. A cost segregation study is the usual way commercial owners pull these shorter-life components out of the building bucket.

Writing It Off in Year One

100% Bonus Depreciation

Bonus depreciation lets you deduct a large percentage of an eligible asset’s cost in the first year instead of spreading it over the full recovery period. The rules shifted significantly in 2025.

Under prior law, 100% bonus was phasing down 20 percentage points per year: 80% in 2023, 60% in 2024, 40% in 2025. The One, Big, Beautiful Bill Act, signed in 2025, scrapped that phase-down and restored 100% bonus depreciation permanently for qualifying property acquired after January 19, 2025.¹

For renovations, this means QIP and 15-year land improvements acquired and placed in service after that date can be deducted in full the year the work is completed. A $600,000 interior commercial renovation that qualifies as QIP and is placed in service in 2026 can be written off entirely that year.²

Two things to know. First, bonus depreciation is automatic. It applies to all eligible property unless you affirmatively opt out by election on Form 4562.³ Second, a reduced 40% rate is available as an alternative election for property placed in service during the first tax year ending after January 19, 2025, which can make sense when a smaller first-year deduction fits your tax picture better.¹

The structural work on a building, the 27.5-year and 39-year stuff, is not eligible for bonus. Bonus only reaches property with a 20-year-or-less life.

Section 179 Expensing

Section 179 is the other route to a first-year deduction, but it works differently from bonus. You have to elect it, there are dollar caps, and it can’t create a loss.

The One, Big, Beautiful Bill Act raised the Section 179 limits substantially. The statutory maximum deduction is now $2,500,000, with a dollar-for-dollar phase-out that begins when total qualifying property placed in service during the year exceeds $4,000,000.⁴ Those figures match the 2025 amounts and will be adjusted for inflation in later years.

Section 179 is also limited to your taxable income from all active trades or businesses; anything above that limit carries forward. QIP is eligible for Section 179, which is useful when you want to control exactly how much of a renovation to expense in a given year rather than taking the automatic 100% bonus write-off.

Common planning sequence: apply Section 179 first up to the income limitation, then let bonus depreciation handle whatever basis remains. With 100% bonus back, many owners don’t need Section 179 for renovation costs at all, but it still earns its keep when income limits or entity-level considerations get in the way.

When ADS Forces a Longer Life

Most owners depreciate under the General Depreciation System (GDS), which produces the 27.5-, 39-, and 15-year lives above. Certain taxpayers are stuck with the Alternative Depreciation System (ADS), which stretches those lives out and uses straight-line only.

ADS is mandatory for:

Property used predominantly outside the United States
Tax-exempt use property or tax-exempt bond-financed property
Any real property held by a business that elected out of the Section 163(j) business interest deduction limitation

That last one catches real estate businesses by surprise regularly. Under ADS, residential rental runs 30 years instead of 27.5, nonresidential real property runs 40 years instead of 39, and QIP runs 20 years instead of 15.³ Property depreciated under ADS does not qualify for bonus depreciation at all. The Section 163(j) election is irrevocable, so a business that made it to deduct more interest is permanently locked out of bonus on its real property.

Is It Even a Capital Improvement?

None of this applies if the expenditure is a repair. Repairs are fully deductible in the year you pay them. Capital improvements are added to basis and depreciated.⁵

An expenditure is a capital improvement when it meets any one of three tests under the IRS tangible property regulations:⁶

Betterment: fixes a pre-existing defect, enlarges the property, or materially increases its capacity, strength, or quality.
Restoration: replaces a major component or substantial structural part, or returns the property to working condition after it has deteriorated to the point of being non-functional.
Adaptation: modifies the property for a new or different use.

Meet any one of those tests and you capitalize. Meet none and you deduct now.

Three safe harbors can keep smaller expenditures off the depreciation schedule even when they’d otherwise look like improvements. The de minimis safe harbor lets you expense items or invoices up to $2,500 each ($5,000 with audited financial statements). The routine maintenance safe harbor covers recurring work you reasonably expect to perform more than once during the first ten years after the building is placed in service. The small taxpayer safe harbor applies if average annual gross receipts are $10 million or less and the building’s unadjusted basis is $1 million or less, letting you deduct all repair, maintenance, and improvement costs for that building as long as total annual spending stays within the lesser of $10,000 or 2% of the building’s unadjusted basis.⁶

When the Clock Starts and What Counts as Basis

Depreciation starts on the placed-in-service date, which is the date the improved property is ready and available for its intended use. That’s not the date you signed the contract or broke ground, and it’s not the date a tenant actually moved in. A renovated apartment is placed in service when it’s ready for a tenant to occupy, whether anyone has or not.³

The depreciable basis is the total cost to complete the work and get it ready for use: materials, labor, installation, architect and engineering fees, and permit costs. If you elect Section 179 on part of the cost, subtract that before computing bonus or regular MACRS depreciation on the rest.

One trap worth flagging. If your renovation involves tearing down an existing structure, the demolition costs are not deductible and they do not get added to the new building. They get added to the basis of the land.⁷ Since land never depreciates, demolition costs sit there earning you nothing until you sell the property.

What Happens When You Sell

Every dollar of depreciation you claim on a renovation reduces your basis, and the IRS gets some of that benefit back at sale. For real property improvements (27.5- and 39-year assets), the depreciation claimed is recaptured as “unrecaptured Section 1250 gain,” taxed at a maximum rate of 25% rather than the lower long-term capital gains rate.⁸

For personal property items reclassified through cost segregation (carpeting, appliances, decorative lighting, and similar Section 1245 property), recapture is harsher: taxed as ordinary income up to the lesser of total depreciation claimed or the gain on the sale.⁹

Recapture doesn’t mean the accelerated deductions were a mistake. You got the deduction in an earlier year when the money was worth more, and the recapture tax comes due only if you sell at a gain. The time value of that deferral is the whole point. Keep permanent records of every dollar of depreciation claimed so recapture can be computed correctly when the property goes.¹⁰

1
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
2
Internal Revenue Service. One, Big, Beautiful Bill Provisions
3
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
4
Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets
5
Internal Revenue Service. Topic No. 704, Depreciation
6
Internal Revenue Service. Tangible Property Final Regulations – Frequently Asked Questions
7
Internal Revenue Service. Publication 551 (2025), Basis of Assets
8
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
9
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
10
Internal Revenue Service. Publication 544 (2025), Sales and Other Dispositions of Assets