How Does the IRS Determine Depreciation Schedules?
The IRS assigns assets to property classes with specific recovery periods. Residential rental property depreciates over 27.5 years; commercial real estate over 39 years. Computers and office equipment typically depreciate over 5 years; vehicles over 5 years; office furniture and fixtures over 7 years. The Modified Accelerated Cost Recovery System (MACRS) governs most depreciation calculations for U.S. businesses.
What Is Bonus Depreciation and Section 179?
Section 179 allows immediate deduction of the full cost of qualifying equipment and software up to an annual limit, currently over $1 million. Bonus depreciation allows a large percentage of qualifying new or used property costs to be deducted in the first year without a dollar cap. Both provisions accelerate deductions, improving cash flow in the year of purchase.
What Happens When You Sell a Depreciated Asset?
When you sell a depreciated asset at a gain, the IRS 'recaptures' prior depreciation deductions and taxes them — for real estate, at a maximum rate of 25%. This depreciation recapture is taxed as ordinary income up to the amount of depreciation previously claimed, even if the overall sale qualifies for capital gains treatment. Planning for recapture is essential in real estate exit strategies.
Frequently asked questions
Can individuals claim depreciation, or only businesses?
Individuals who own rental property or use property for business purposes can claim depreciation. A person who rents out a home or owns investment real estate deducts depreciation on Schedule E. Personal-use property — your primary residence, personal vehicle — cannot be depreciated.
What is the difference between depreciation and amortization?
Depreciation applies to tangible assets like buildings and equipment. Amortization applies to intangible assets like patents, trademarks, and goodwill. Both spread the cost of an asset over its useful life, but the IRS applies different rules and recovery periods to each category.