What Is the Useful Life of a Building for Depreciation?

In accounting, useful life is an estimate of the period over which an asset, like a building, is expected to be productive. For tax purposes, however, this concept is more rigid and is defined by law rather than an asset’s actual durability. The Internal Revenue Service (IRS) establishes a predetermined “recovery period,” which is the term used for an asset’s useful life in tax calculations.

This recovery period dictates the timeline over which a property owner can claim depreciation deductions. Depreciation allows the owner to systematically expense the cost of the building over its recovery period, which reduces their taxable income each year. This process accounts for the wear and tear on the property, even as its market value might be appreciating.

Standard Recovery Periods for Real Property

The Modified Accelerated Cost Recovery System (MACRS) is the required IRS system for calculating depreciation on properties placed in service after 1986. This system separates real property into distinct categories with specific recovery periods based on the building’s use.

The two main classifications under MACRS are residential rental property and nonresidential real property. Residential rental property includes buildings where 80% or more of the gross rental income comes from dwelling units, such as apartment buildings. The IRS assigns this category a recovery period of 27.5 years.

Nonresidential real property encompasses commercial buildings like office towers and warehouses that do not meet the 80% residential income test. These properties are assigned a recovery period of 39 years. Both property types must use the straight-line method, which allocates an equal amount of depreciation expense each full year. For example, a commercial building with a cost basis of $390,000 would generate an annual depreciation deduction of $10,000 ($390,000 / 39 years).

Depreciating Building Components

Property owners can accelerate deductions by segregating building components that have shorter useful lives than the structure itself. This is done through a cost segregation study, an engineering-based analysis that allocates a property’s purchase price to its various components. This study separates assets into different classes with faster depreciation schedules.

Through this analysis, parts of the property can be reclassified into categories like personal property or land improvements, which have shorter recovery periods under MACRS. This allows for larger depreciation deductions in the early years of property ownership, improving cash flow by deferring income taxes.

Common examples of components with shorter lives include tangible personal property with a 5-year recovery period, such as carpeting, decorative lighting, and specialized plumbing. Office furniture and certain fixtures fall into a 7-year property class. Land improvements are assigned a 15-year recovery period and include additions to the land like parking lots, fences, and sidewalks.

Treatment of Building Improvements

The tax treatment for expenditures made after a building’s acquisition differs between repairs and improvements. A repair, such as repainting an area or fixing a leak, is a routine maintenance activity that keeps the property in its normal operating condition. These costs are operating expenses and can be fully deducted in the year they are incurred.

A capital improvement, on the other hand, is an expenditure that betters, restores, or adapts the property to a new use. Examples include adding a new wing, replacing an entire roofing system, or overhauling the HVAC system. These costs must be capitalized and depreciated over a set recovery period.

An improvement is treated as a new, separate asset, and its recovery period is the same as the property to which it is attached. For instance, a new roof on a residential rental building would be depreciated over 27.5 years, while a major lobby renovation in a commercial office building would be depreciated over 39 years. Depreciation for the improvement begins on the date it is placed in service.

An exception exists for certain interior upgrades to nonresidential buildings, known as Qualified Improvement Property (QIP). These improvements have a 15-year recovery period and are eligible for bonus depreciation. This allows a business to deduct a large percentage of the cost in the first year the improvement is placed in service. The bonus depreciation rate is 40% for property placed in service in 2025 and is scheduled to decrease to 20% in 2026 before phasing out.