MACRS Depreciation Explained USA 2026 — 27.5-Year, Recapture, Cost Segregation

What is MACRS depreciation?

The Modified Accelerated Cost Recovery System (MACRS) is the IRS method for depreciating business assets, including rental property. Depreciation is a non-cash deduction — it reduces your taxable rental income each year without any actual cash outflow, making it one of the most powerful tax advantages available to real estate investors.

For residential rental property, MACRS uses a 27.5-year straight-line schedule. You divide the depreciable basis of the property by 27.5 to get your annual deduction. Land is never depreciable — only the building and improvements count. Commercial property uses a 39-year schedule instead.

Calculating your annual depreciation

$400,000 rental property — annual depreciation

Purchase price$400,000

Land value (not depreciable, ~20%)−$80,000

Depreciable basis (building only)$320,000

MACRS recovery period (residential)27.5 years

Annual depreciation deduction$11,636/yr

Tax saving @ 32% marginal rate~$3,723/yr

The land value split is typically determined by your county tax assessment ratio or an appraiser. The IRS accepts reasonable allocations — most residential properties sit between 15–25% land value depending on location. High-cost urban markets skew toward higher land percentage, reducing the depreciable basis.

MACRS property classes

Not everything in a rental property depreciates over 27.5 years. Personal property and land improvements qualify for shorter recovery periods — this is the basis of cost segregation.

Asset class	Recovery period	Examples
Residential rental building	27.5 years	Structure, roof, walls, windows
Commercial building	39 years	Office, retail, industrial
Land improvements	15 years	Landscaping, parking lot, fencing, sidewalks
Personal property (appliances)	5 years	Appliances, carpeting, fixtures
Office furniture / equipment	7 years	Desks, computers, office equipment
Land	Not depreciable	Raw land value — never deductible

Cost segregation — accelerating the deduction

A cost segregation study is an engineering analysis that reclassifies components of a building from 27.5-year property into 5-, 7- or 15-year categories. The result: a larger depreciation deduction in the early years of ownership, reducing taxable income significantly in year one.

Cost segregation — $600,000 property, year 1 impact

Without cost segregation (year 1)$17,455

Reclassified to 5-yr property (~10%)$60,000

Reclassified to 15-yr property (~8%)$48,000

Year 1 deduction with cost segregation~$108,000+

Additional year 1 tax saving @ 37%~$33,500

Cost segregation studies typically cost $5,000–$15,000 for a residential rental and make financial sense for properties with a depreciable basis above $500,000. For smaller portfolios, a less formal "look-back" study can still capture missed deductions on properties you already own.

Bonus depreciation in 2026

Bonus depreciation allows immediate expensing of qualifying assets rather than spreading deductions over the recovery period. Under the Tax Cuts and Jobs Act (TCJA), bonus depreciation was 100% through 2022, then phased down: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. It phases out entirely after 2026 unless Congress extends it.

Bonus depreciation applies to assets with a recovery period of 20 years or less — meaning the 5-, 7- and 15-year components identified in a cost segregation study qualify, but the 27.5-year building structure does not. In 2026, 20% of qualifying personal property and land improvements can be expensed immediately.

Year	Bonus depreciation rate	Applies to
2022	100%	≤20-year property
2023	80%	≤20-year property
2024	60%	≤20-year property
2025	40%	≤20-year property
2026	20%	≤20-year property
2027+	0% (current law)	Subject to legislative extension

Depreciation recapture — the hidden cost at sale

Depreciation is not a free lunch. When you sell the property, the IRS recaptures all depreciation you claimed (or were entitled to claim) at a maximum 25% recapture rate — higher than the standard long-term capital gains rate of 15–20%. The recapture applies whether or not you actually took the deductions.

Depreciation recapture at sale — 10 years held

Total depreciation claimed (10 × $11,636)$116,360

Recapture tax rate (Section 1250)25%

Recapture tax owed at sale$29,090

Remaining gain taxed at LTCG rate15–20%

Annual tax benefit received (@ 32%)$37,235
over 10 yrs

Net benefit after recapture~$8,145

Even after recapture, depreciation produces a net tax benefit due to the time value of money — you saved taxes over 10 years and pay a portion back at sale. A 1031 exchange defers both capital gains and depreciation recapture indefinitely, which is why serial investors rarely trigger recapture.

Key point

Depreciation is the IRS giving you an annual tax deduction for an asset that often appreciates in value — a structural advantage of real estate over most other investments. The 27.5-year schedule is generous, cost segregation makes it more powerful, and a 1031 exchange lets you defer recapture forever. The investors who ignore depreciation planning are leaving thousands in annual tax savings on the table. Work with a CPA who specialises in real estate to optimise your schedule from year one.

Frequently asked questions

Can I depreciate a property I live in part of the year?

Only the rental portion is depreciable. If you rent a property for part of the year and use it personally for more than 14 days or 10% of rental days, it's treated as a vacation home — depreciation and expenses are prorated based on the ratio of rental days to total days of use. A full-time rental with no personal use qualifies for full depreciation.

What happens if I never claimed depreciation?

The IRS recaptures depreciation you were "allowed or allowable" — meaning even if you never took the deduction, recapture tax applies at sale based on the amount you could have claimed. If you missed years of depreciation, you can file Form 3115 to catch up in a single year without amending past returns. Not claiming is the worst of both worlds: no annual tax saving and full recapture at sale.

Does a 1031 exchange eliminate depreciation recapture?

It defers it, not eliminates. In a 1031 exchange, the depreciation basis of the relinquished property carries over to the replacement property. Recapture is triggered when you eventually sell without exchanging. Many investors exchange repeatedly and pass the property to heirs at a stepped-up basis at death — at that point accumulated depreciation recapture disappears entirely under current law.

Is cost segregation worth it for a single rental property?

Generally only for properties with a depreciable basis above $400,000–$500,000. A formal cost segregation study costs $5,000–$15,000 — at smaller property values the upfront cost consumes most of the benefit. For smaller portfolios, some CPAs offer less formal component analyses that capture the main items (appliances, carpeting, site improvements) at lower cost. For a 10-unit multifamily or commercial property, cost segregation almost always pays for itself in year one.

How does depreciation interact with passive activity rules?

Rental losses — including depreciation deductions that create a paper loss — are generally classified as passive. Passive losses can only offset passive income unless you qualify as a real estate professional (750+ hours/year, more than 50% of working time in real estate). Non-professionals with AGI under $100,000 can deduct up to $25,000 of rental losses against ordinary income; this phases out between $100,000 and $150,000 AGI. Unused passive losses carry forward and offset future passive income or the gain at sale.