Depreciation Basics
See how businesses deduct an asset's cost over time, and how Section 179 and bonus rules speed it up.
TL;DR
- Spread an asset's cost over its
usefulLife, not all in one year. - Speed it up with
Section179or 100%bonusDepreciationin 2026. - Expect
recapturetax up to 25% when you sell real estate.
What Depreciation Is
Spread the CostDeduct an asset a piece at a time over its life.
Cost spread over the yearsRecovery PeriodsThe IRS sets how many years each asset takes.
Equipment 5-7, rental 27.5Not LandLand never depreciates because it does not wear out.
Building yes, land noBusiness Share OnlyMixed-use assets depreciate their business part.
Deduct the business percentageTwo Methods
Straight-LineEqual deductions each year over the asset's life.
(Cost - salvage) / lifeRequired for Real EstateBuildings must use straight-line depreciation.
Rental 27.5 yr, commercial 39 yrMACRSAccelerated method that front-loads the deduction.
More early, less laterEquipment Uses MACRSMost machinery and computers depreciate this way.
5- and 7-year propertySpeed It Up
Section 179Expense qualifying equipment in full the first year.
Up to $2,560,000 in 2026Income CapSection 179 cannot push the business into a loss.
Limited to business incomeBonus DepreciationDeduct 100% of eligible assets, even into a loss.
100% in 2026, made permanentNo BuildingsBonus applies to assets under 20-year life, not buildings.
Equipment yes, buildings noRecapture at Sale
Depreciation ReturnsPast deductions are taxed back when you sell.
Claimed depreciation recapturedUp to 25%Real estate recapture is taxed at up to 25%.
On top of capital gainsPlan for ItModel recapture before selling a rental.
Bigger bill than expected1031 Defers ItA like-kind exchange postpones the recapture too.
Defer with a 1031Tips
- Stack the tools: take
Section179up to your business income first, then letbonusDepreciationcover the rest, even into a loss. - Separate
landfrom building value at purchase, since only the building depreciates and land never does.
Warnings
- Land is never depreciable, and a mixed-use asset only depreciates its
businessUseshare. - Selling depreciated real estate triggers
recapturetaxed up to 25%, on top of any capital gain.
In Practice
See how straight-line depreciation shelters rental income year after year.
You buy a residential rental, and the building portion (not the land) is worth $275,000.
- Residential rental uses 27.5-year straight-line.
- Annual depreciation: $275,000 / 27.5 = $10,000.
- That $10,000 offsets rental income every year.
- At sale, the depreciation claimed is recaptured up to 25%.
You deduct $10,000 a year, recaptured when you sell.
Depreciation shelters income now but returns partly as tax at sale.
FAQ
It is deducting the cost of a business asset over its useful life instead of all at once. The IRS requires it for most assets because they wear out gradually. Equipment, vehicles, and buildings used in a business are depreciable; land is not, because it does not wear out.
Straight-line spreads the cost evenly, giving equal deductions each year, and it is required for real estate. MACRS is accelerated: it front-loads the deductions so you write off more in the early years. Most equipment uses MACRS, while residential rental and commercial buildings must use straight-line.
Up to $2,560,000 of qualifying equipment and software, with the benefit phasing out once purchases exceed $4,090,000. Section 179 cannot create a loss; it is capped at your business's taxable income, and any unused amount carries forward. Bonus depreciation, at 100% in 2026, can create a loss.
You face depreciation recapture. The gain tied to the depreciation you claimed is taxed as ordinary income, up to 25% for real estate, on top of any capital gains tax on further appreciation. It is why the tax bill on selling a long-held rental is often larger than owners expect.