Which Assets Cannot Be Depreciated? Land, Inventory, and Intangibles

The assets that cannot be depreciated fall into a handful of categories: land, property you use for personal purposes, inventory held for sale, assets with no determinable useful life, most intangible assets, property you do not own, and property that has not yet been placed in service. To claim a depreciation deduction, the tax code requires that you own the property, use it in a business or income-producing activity, expect it to last more than one year, and be able to estimate how long it will remain useful.¹ An asset that fails any one of those tests is non-depreciable, no matter how much it cost.

Land

Land is the classic example. Federal regulations treat the physical ground as permanent because it does not wear out, decay, or get used up.² Depreciation exists to account for property losing value through use over time, and something with an indefinite life has nothing to write off.

When you buy real estate, you have to split the purchase price between the land and any buildings on it. Only the structures are depreciable. The land portion sits on your balance sheet at its original cost. If you paid $500,000 for a commercial property and $150,000 was attributable to the land, your depreciable basis is $350,000.

Land Improvements That Do Qualify

The ground itself is off-limits, but many additions to it are depreciable. Fences, sidewalks, roads, shrubbery, and bridges are classified as 15-year property under the Modified Accelerated Cost Recovery System.³ Certain land preparation costs tied to a depreciable building can also be written off when you can assign them a useful life connected to that building.

Personal-Use Property

Depreciation is only available for property used in a trade or business or held for the production of income.⁴ A car you drive for personal errands, the furniture in your living room, and your primary residence all fall outside those categories. Price and rate of wear are irrelevant. If you do not use it for business, it produces no depreciation deduction.

When an asset serves both business and personal purposes, only the business-use percentage qualifies. A laptop used for freelance work and streaming movies is a common example. You need to track the split carefully, because the IRS can deny the entire deduction if you cannot substantiate the business portion.

Home Office Exception

If you use part of your home regularly and exclusively as an office, that portion can be depreciated. A single-family home converted partly to office use is depreciated as nonresidential real property over 39 years.³ The requirement is exclusive use. A guest bedroom you occasionally work from does not qualify.

Inventory and Stock in Trade

Items you hold primarily for sale to customers are not depreciable. The IRS draws a clean line: inventory is not held for use in your business, it is held for sale.³ You recover inventory cost through cost of goods sold when the item actually sells, matching the expense to the revenue it generates.

The same logic covers raw materials and work in process. A furniture maker cannot depreciate the lumber sitting in the shop because that lumber will eventually become a finished product for sale. The cost hits the books when the completed piece sells.

Materials and Supplies

Low-cost supplies used in your business, such as pens, cleaning products, fuel, and lubricants, sit in a separate category. You can generally deduct these immediately rather than depreciating them. The IRS allows an immediate deduction for tangible property with a useful life of 12 months or less, or that costs $200 or less per item. Beyond that, a de minimis safe harbor lets you expense items costing up to $2,500 per invoice, or $5,000 if you have audited financial statements.⁵

Assets Without a Determinable Useful Life

Every depreciable asset must have a useful life you can reasonably estimate. It has to wear out, decay, get used up, or become obsolete.³ When an asset has no foreseeable endpoint, there is no basis for calculating annual deductions.

Art, Antiques, and Collectibles

Valuable art, antiques, and rare collectibles typically lack a determinable useful life. A painting displayed in a corporate office may pick up minor physical wear, but its value often rises over time rather than falls. The IRS concluded in Revenue Ruling 68-232 that “valuable and treasured” artwork is generally not depreciable because physical condition does not limit or determine its useful life. Unless you can demonstrate that a piece of art is subject to significant physical deterioration from its business use, the deduction is unavailable.

Digital Assets

Cryptocurrency, NFTs, and other digital assets are treated as property for federal tax purposes rather than as currency.⁶ The IRS treats them as capital assets, so gains and losses are reported when you sell or exchange them, not through annual depreciation.⁷ They do not wear out or become obsolete the way physical equipment does, so they fail the determinable-useful-life test.

Intangible Assets

Intangible assets such as goodwill, trademarks, trade names, franchises, customer lists, and patents cannot be depreciated in the traditional sense. When you acquire them as part of buying a business, they fall under Section 197 of the tax code and are amortized over a flat 15-year period.⁸ The statute explicitly bars any other depreciation or amortization method for these assets.

Self-created intangibles face a stricter rule. If you build a brand name or develop goodwill organically rather than buying it as part of a business acquisition, you generally cannot amortize the costs at all under Section 197.⁸ Money you spend building a reputation through marketing may be deductible as a current business expense, but the resulting brand value is not a depreciable or amortizable asset.

Off-the-Shelf Computer Software

Computer software acquired as part of a business purchase is a Section 197 intangible amortized over 15 years. Off-the-shelf software follows a different rule. If the software is readily available to the general public, sold under a nonexclusive license, and has not been substantially modified, you depreciate it using the straight-line method over 36 months.³

Property You Do Not Own

You must hold the incidents of ownership, meaning the economic risk of loss and the right to benefit from the asset, before you can claim depreciation.⁴ A tenant renting office space cannot depreciate the building because the landlord holds the capital investment. The deduction belongs to whoever bears the financial risk of owning the property.

Leasehold Improvements

Tenants who make permanent improvements to rented space get an exception. If you install new flooring, build interior walls, or add lighting fixtures in a leased space, you can depreciate those improvements even though you do not own the building.³ Each improvement is treated as a separate depreciable asset, generally depreciated as nonresidential real property over 39 years, though qualified improvement property may be eligible for faster cost recovery.

Property Not Yet Placed in Service

An asset must be placed in service before depreciation begins. The IRS defines this as the moment the property is ready and available for its specific use, whether or not you are actually using it.³ Equipment sitting in a shipping crate, a building under construction, or a vehicle waiting at the dealership does not qualify until it is functional and available.

The timing matters for year-end planning. A machine you paid for in December but did not install until January generates no depreciation for the earlier tax year.

Temporarily Idle Assets

Once an asset is placed in service, depreciation continues even if you temporarily stop using it. A machine sitting idle because demand dropped for the product it makes still generates deductions during the downtime.³ The word to watch is “temporarily.” An asset permanently removed from service no longer qualifies.

Certain Term Interests Held by Related Parties

A less common exclusion applies to term interests in property, where one person holds temporary rights and a related person holds the remainder interest. If you own a life estate in a building and your sibling owns the remainder, you cannot depreciate the building during the period your sibling holds that remainder interest.⁴ The rule keeps families from generating artificial depreciation deductions by splitting ownership among related parties. Any disallowed depreciation reduces your basis in the term interest and increases the basis of the remainder interest.

Repairs vs. Capital Improvements

Not every dollar you spend on business property creates a depreciable asset. Routine repairs and maintenance, such as fixing a leak, repainting a wall, or replacing a broken window, are typically deductible as current business expenses in the year you pay for them. Only spending that rises to a capital improvement has to be depreciated over time.

The IRS uses three tests to decide whether a cost is an improvement rather than a repair. An expenditure is a capital improvement if it does any of the following to a unit of property:⁵

Betterment: fixing a pre-existing defect, adding a major component, physically enlarging the property, or materially increasing its capacity, productivity, or efficiency.
Restoration: replacing a major component or substantial structural part, returning the property to working condition after it has become non-functional, or rebuilding it to like-new condition after the end of its class life.
Adaptation: converting the property to a new or different use that is not consistent with its original purpose when you placed it in service.

If a repair does not meet any of those three tests, you can generally deduct the full cost immediately. Getting the classification wrong can either cost you a current deduction you were entitled to or trigger penalties for improperly claiming depreciation on an item that should have been capitalized.

Fixing a Mistaken Depreciation Claim

If you claimed depreciation on a non-depreciable asset, or failed to claim depreciation you were entitled to, the IRS generally requires Form 3115 (Application for Change in Accounting Method) to fix the error.⁹ You cannot simply adjust next year’s return. The form produces a Section 481(a) adjustment that corrects the cumulative error: a negative adjustment (the IRS owes you) is taken in one year, while a positive adjustment (you owe the IRS) is spread over four years.

Claiming depreciation you did not qualify for can also result in an accuracy-related penalty of 20% of the underpaid tax if the IRS determines the error was due to negligence or a substantial understatement of income.¹⁰ Keeping clear records of when property was placed in service, how it is used, and how the purchase price was allocated between depreciable and non-depreciable components is the simplest way to avoid these problems.

1
Internal Revenue Service. Topic No. 704, Depreciation
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eCFR. 26 CFR 1.167(a) – Depreciation Allowances
3
Internal Revenue Service. Publication 946, How To Depreciate Property
4
Office of the Law Revision Counsel. 26 USC 167 – Depreciation
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Internal Revenue Service. Tangible Property Final Regulations
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Internal Revenue Service. Frequently Asked Questions on Virtual Currency Transactions
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Internal Revenue Service. Digital Assets
8
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
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Internal Revenue Service. Instructions for Form 3115, Application for Change in Accounting Method
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Internal Revenue Service. Accuracy-Related Penalty