How to Use the 27.5 MACRS Table for Rental Property

The Internal Revenue Service (IRS) allows owners of income-producing property to recover its cost over time through annual tax deductions, a process known as depreciation. For property placed in service after 1986, the Modified Accelerated Cost Recovery System (MACRS) is used. MACRS categorizes assets into classes with specified recovery periods that dictate how costs are deducted.

Qualifying Residential Rental Property

The 27.5-year recovery period under MACRS is for property classified as “residential rental property.” To qualify, a building must meet an income test where 80% or more of its gross rental income for the tax year comes from dwelling units. A dwelling unit is a house or apartment providing living accommodations, not including units in hotels or motels where over half are used by transients.

Properties like single-family homes, duplexes, and apartment buildings used for long-term rentals fit this category. This 27.5-year period differs from nonresidential real property, like an office building or retail store, which is depreciated over 39 years.

If you own a duplex and live in one unit while renting out the other, only the rental portion is depreciated. If a property has both residential and commercial use, the 80% income test determines its classification. If commercial use generates over 20% of the gross rental income, the entire property is depreciated as nonresidential real property.

Determining Your Depreciable Basis and Placed in Service Date

Before calculating your depreciation deduction, you must determine the property’s depreciable basis and its placed-in-service date. The basis is your investment in the property for tax purposes. For a purchased rental property, this begins with the purchase price and includes certain closing costs, such as legal fees, recording fees, and transfer taxes.

Land is not depreciable, so you must subtract its value from the total cost to find the building’s depreciable basis. You can determine the land’s value using the property’s real estate tax assessment, which often separates land and building values, or through a professional appraisal.

The second figure is the “placed in service” date, which is when the property is ready and available for its intended use. For a rental, this is the date it is ready for a tenant to occupy, even if one has not been found. For example, if you buy a house in May, spend two months on repairs, and advertise it for rent on July 5th, the placed-in-service date is in July.

How to Calculate Depreciation Using the Table

With your depreciable basis and placed-in-service date, you can calculate the annual depreciation deduction. For 27.5-year residential rental property, use the General Depreciation System (GDS) table, which uses a mid-month convention. The mid-month convention treats property placed in service during any day of a month as being placed in service in the middle of that month.

The table below is from IRS Publication 946. The top shows the month the property was placed in service, and the side shows the ownership year.

GDS 27.5-Year Residential Rental Property (Mid-Month Convention)

| Year(s) | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
| :— | :-: | :-: | :-: | :-: | :-: | :-: | :-: | :-: | :-: | :-: | :-: | :-: |
| 1 | 3.485% | 3.182% | 2.879% | 2.576% | 2.273% | 1.970% | 1.667% | 1.364% | 1.061% | 0.758% | 0.455% | 0.152% |
| 2-27 | 3.636% | 3.636% | 3.636% | 3.636% | 3.636% | 3.636% | 3.636% | 3.636% | 3.636% | 3.636% | 3.636% | 3.636% |
| 28 | 0.152% | 0.455% | 0.758% | 1.061% | 1.364% | 1.667% | 1.970% | 2.273% | 2.576% | 2.879% | 3.182% | 3.485% |

To use the table, assume a depreciable basis of $300,000 and a placed-in-service date of May. For the first year, find the row for Year 1 and the column for May. The percentage is 2.273%. Multiply your depreciable basis by this percentage for your first-year deduction: $300,000 x 0.02273 = $6,819.

For years 2 through 27, use the percentage from the second row, 3.636%. The annual deduction for these years would be $300,000 x 0.03636, which equals $10,908. This continues until you recover your cost basis or dispose of the property.

When you sell the property, the final year’s calculation also uses the mid-month convention. The table provides percentages for the final year based on the original month the property was placed in service, ensuring the total depreciation is correct.