42.12 MACRS for Real Estate Placed in Service After 1986

The recovery period for residential rental property placed in service after December 31, 1986, is 27.5 years. The recovery period for nonresidential real property is either 39 years or 31.5 years, depending on when the property was placed in service.

The method of recovery for nonresidential or residential property is the straight-line method using a mid-month convention. See the next page for rate tables for each class of property.

For nonresidential real property placed in service after December 31, 1986, but before May 13, 1993, the depreciation recovery period is 31.5 years.

For nonresidential real property placed in service after May 12, 1993, the recovery period is 39 years. Under a transition rule, the 31.5-year recovery period rather than the 39-year recovery period applies to a building placed in service before 1994 if before May 13, 1993, you had entered into a binding, written contract to buy or build it, or if, before that date, you had begun construction. The transition rule also applies if you obtained the contract or property from someone else who satisfied the pre–May 13, 1993, contract or construction requirement, provided he or she never put the building in service and you did so before 1994.

Residential rental property subject to the 27.5 year recovery period is defined as a rental building or structure for which 80% or more of the gross rental income for the tax year is rental income from dwelling units. If you occupy any part of the building, the gross rental income includes the fair rental value of the part you occupy.

A dwelling unit is a house or an apartment used to provide living accommodations in a building or structure, but not a unit in a hotel, motel, inn, or other establishment where more than one-half of the units are used on a transient basis.

Filing Tip

Additions and Improvements

The MACRS class for an addition or improvement is generally determined by the MACRS class of the property to which the addition or improvement is made. For example, if you put an addition on a rental home that you are depreciating over 27.5 years, the addition is depreciated as 27.5-year residential rental property. The period for figuring depreciation begins on the date that the addition or improvement is placed in service, or, if later, the date that the property to which the addition or improvement was made is placed in service.

- - - - - - - - - -

Mid-month convention.

Under a mid-month convention, all residential rental property and nonresidential real property placed in service or disposed of during any month is treated as placed in service or disposed of at the midpoint of that month. You may determine the first-year deduction for your property by applying the percentage from Table 42-4 to the original depreciable basis. In later years, use the same column of the table to figure your deduction. If the property is disposed of before the end of the recovery period, the deduction for the year of disposition is figured by prorating the full-year deduction for the months the property was in service, treating the month of dispostion as one-half of a month of use.

Additions or improvements to property.

The depreciation deduction for any additions to, or improvement of, any property is figured in the same way as the deduction for the property would be figured if the property had been placed in service at the same time as the addition or improvement.

Table 42-4 MACRS Real Estate Depreciation