What Is the Useful Life of a Building for Depreciation?

A building’s useful life is an accounting concept representing the period it is expected to generate revenue, allowing its cost to be expensed over time through depreciation. While a company might estimate a building’s actual lifespan for internal accounting, federal tax law operates differently and uses strictly defined timeframes.

Establishing the Building’s Depreciable Basis

Before depreciation can be calculated, a property owner must determine the building’s depreciable basis. This figure is the starting point for the calculation and begins with the property’s purchase price, plus other acquisition-related expenses like legal fees, surveys, and title insurance.

The total cost basis must be allocated between the land and the building, as the IRS prohibits depreciating land due to its indefinite useful life. Only the value assigned to the building can be depreciated, and failing to separate these values is a common error.

A common allocation method is using the property tax assessor’s valuation. For example, if a tax assessment values a building at 80% of a property’s total value, the owner would apply that 80% ratio to the purchase price to find the building’s depreciable basis. Other methods include using a formal appraisal or analyzing comparable sales of vacant lots.

IRS Mandated Recovery Periods

The IRS specifies a building’s useful life, or “recovery period,” through the Modified Accelerated Cost Recovery System (MACRS). This system mandates specific timeframes based on the property’s classification into one of two categories, each with its own recovery period.

The first category, residential rental property, has a recovery period of 27.5 years. A property qualifies if 80% or more of its gross rental income comes from dwelling units like houses or apartments. This excludes properties where over half the units are used on a transient basis, such as hotels.

The second category is nonresidential real property, with a recovery period of 39 years. This class includes commercial buildings like offices, retail stores, and warehouses. Any income-producing building that does not meet the 80% residential rental test falls into this category.

Both property types under MACRS must use the straight-line depreciation method, spreading the basis evenly over the recovery period. The IRS also requires a mid-month convention, which treats property as placed in service or disposed of in the middle of the month, regardless of the actual date. This standardizes the calculation for the first and last years of ownership.

Depreciation of Building Improvements

Expenses on a property after its acquisition are treated differently for tax purposes, depending on their classification as a capital improvement or a routine repair. A capital improvement is an expenditure that betters a property, restores it, or adapts it to a new use. Examples include adding a new roof, installing a new HVAC system, or building an addition.

In contrast, a repair is an expense that keeps the property in its ordinary operating condition without materially adding to its value or prolonging its life. Common examples of repairs include fixing a leaky faucet, repainting a room, or replacing a broken window pane. Repairs are deducted as expenses in the year they are paid.

Capital improvements cannot be deducted in the year they occur. The cost must be capitalized and depreciated separately from the building. Under MACRS, the improvement is treated as a new asset and depreciated using the same method and recovery period as the original property, such as 27.5 years for a new roof on a residential rental building.