Cost Recovery / Depreciation for Real Estate Investments

If you have purchased property that you intend to rent or converted a previously owner-occupied unit to rental property, you cannot deduct the entire cost of the property in the year in which you purchased it. The Internal Revenue Service, IRS, considers real estate a capital asset, meaning it has a useful life of more than one year. The cost of all capital assets must be allocated over the useful life of the asset as determined by the IRS. Current IRS regulations require you to depreciate all rental property with the Modified Accelerated Cost Recovery System, MACRS. Before you can calculate depreciation for real estate investments, you must determine the cost basis in the asset.

Cost recovery (depreciation) is the periodic allocation of the cost of qualified assets.  When a taxpayer, or in some cases a lessee, purchases a qualified asset they are allowed to recover the acquisition cost of the asset through certain deductions set forth in the Internal Revenue Code.  The method and length of recovery periods depend on the type of property purchased.  The IRS has produced cost recovery tables for the various types of property.

As of the time of this writing (Fall 2013), the following are the current depreciation categories and recovery percentages:

Recovery Percentages for Residential Rental Property
27.5 years

Recovery Percentages for Non-Residential Rental Property
39 years

Recovery Percentages for Land Improvements
15 years

Recovery Percentages for Personal Property
5 years

Land
Sorry, no depreciation is allowed for land