MACRS, the Modified Accelerated Cost Recovery System, is the depreciation regime the tax code makes you use. It answers three questions about every asset: how many years you write it off over, how fast within those years, and how much you get in the year you buy it. Get those answers right and the same $200,000 of building components can produce $2,350 of first-year deduction or $200,000. That gap is the entire reason cost segregation exists.
The short answer - MACRS assigns each asset a recovery period, a method, and a convention. Change the recovery period and everything else follows. - Buildings are the slow lane: 27.5 years for residential rental, 39 years for nonresidential, both straight-line with a mid-month convention. - Personal property is the fast lane: 5- and 7-year property uses 200% declining balance, land improvements use 150%, and both are bonus-eligible. - The convention decides your first year. Half-year for personal property, mid-month for buildings, and mid-quarter when too much lands in the fourth quarter. - MACRS is not book depreciation, and your two schedules will not match.
The Three Things MACRS Decides About Every Asset
The recovery period is how many years the deduction spreads across, set by the asset's class rather than how long you expect it to last.
The method is how the deduction is distributed within those years. Straight line spreads it evenly; declining balance front-loads it.
The convention is the assumption about when during the year the asset went into service, since the code will not track the actual date.
Salvage value plays no part. MACRS depreciates the full basis to zero, one reason tax and book depreciation drift apart from day one.
Recovery Periods: The Table That Drives Everything
| Class | Method | What lives here |
|---|---|---|
| 5-year | 200% declining balance | Carpeting, decorative lighting, dedicated electrical for equipment, cabinetry and millwork, appliances, window treatments, removable flooring, security and communication equipment, some specialty plumbing |
| 7-year | 200% declining balance | Certain office furniture, fixtures, and equipment |
| 15-year land improvements | 150% declining balance | Paving, sidewalks, curbs, site utilities, landscaping, fencing, site lighting, retaining walls, signage, drainage |
| 15-year QIP | Straight line | Interior improvements to a nonresidential building placed in service after the building was, excluding enlargement, elevators and escalators, and internal structural framework |
| 27.5-year | Straight line, mid-month | Residential rental building structure |
| 39-year | Straight line, mid-month | Nonresidential real property structure, including stand-alone open-air parking structures |
When you buy a building, your CPA has one line on the closing statement and no way to know which class those dollars belong to, so everything defaults to 27.5 or 39 years. A study breaks the number apart, and the detailed examples of 5-, 7-, and 15-year property show how granular that gets. Note that 15-year QIP uses straight line rather than declining balance, yet is still bonus-eligible; the QIP rules have their own traps.
Declining Balance Versus Straight Line
Straight line is what it sounds like. A 39-year asset gets 1/39th of its basis each year, roughly 2.56%.
Declining balance applies a multiple of the straight-line rate to the asset's remaining basis. For 5-year property the 200% rate is 2 divided by 5, or 40% of what is left, producing 20%, 32%, 19.2%, 11.52%, and 11.52% of original basis across five years under the half-year convention, then 5.76% in year six.
Land improvements use 150% declining balance, 1.5 divided by 15, or 10% of remaining basis annually. Slower than 5-year property, far faster than the building. Both methods switch to straight line automatically in the year that produces a larger deduction; the tables build it in.
Conventions: Half-Year, Mid-Quarter, and Mid-Month
Half-year is the default for personal property. Whatever month you place a 5-year asset in service, you get half a year of depreciation in year one and a stub half-year at the end. That is why a 5-year asset actually depreciates over six tax years.
Mid-month applies to real property. A 39-year building placed in service in July is treated as placed in service on July 15, giving you 5.5 months of depreciation in year one.
Mid-quarter is the one that surprises people. If more than 40% of the aggregate basis of personal property placed in service during the year lands in the last three months, half-year is thrown out for all personal property that year, and each asset instead depreciates from the midpoint of its own quarter.
The swing is large. For 5-year property, first-year depreciation is 35% under a first-quarter placement and 5% under a fourth-quarter one. On $200,000 of assets, $70,000 versus $10,000.
The practical read: when you take 100% bonus, the convention rarely changes your answer, because the whole basis is deducted in year one anyway. Mid-quarter matters when you elect out of bonus, when assets are not bonus-eligible, or in a state decoupled from §168(k).
What $200,000 Actually Does on Three Different Clocks
Example: $200,000 of components in a nonresidential building placed in service in July Same dollars, same building, three different classifications.
| Treatment | Year 1 | Year 2 | Cumulative through year 5 |
|---|---|---|---|
| 39-year straight line, mid-month | $2,350 | $5,128 | $22,863 |
| 5-year, 200% declining balance, half-year | $40,000 | $64,000 | $188,480 |
| 5-year with 100% bonus depreciation | $200,000 | $0 | $200,000 |
Read the first row against the third. Left on the 39-year clock, those components return $22,863 over five years. Correctly classified as 5-year property with bonus, they return the entire $200,000 in year one, roughly $70,000 of tax deferred at a combined 35% rate rather than trickling in over four decades.
That is the whole mechanism. Cost segregation does not create deductions. It moves them from the 39-year column to the 5- and 15-year columns, where bonus depreciation can reach them. Your result depends on your tax rate and whether you can use passive losses.
MACRS Is Not Book Depreciation, and the Two Will Diverge
This is the honest caveat, and it catches owners with partners, lenders, or audited financials.
Book depreciation uses estimated useful life and salvage value, usually straight line. MACRS uses statutory lives, ignores salvage, and front-loads. The two were never meant to agree, and after a study they diverge sharply, producing a deferred tax liability on the balance sheet and book income well above taxable income.
Three consequences worth planning for. Your lender may covenant on book numbers a study does not improve. Your partners will see a K-1 loss that does not match the property's operating performance, so explain it in advance. And accelerating MACRS changes only the timing of deductions, never the total, with the trade-off arriving at sale through §1245 and §1250 recapture.
Frequently Asked Questions
Does MACRS apply to residential rental property?
Yes. Residential rental buildings are 27.5-year property under MACRS, depreciated straight line with a mid-month convention. The components inside, such as appliances, carpeting, and cabinetry, are separate assets with their own shorter lives.
Can I choose a longer recovery period to smooth my deductions?
The alternative depreciation system exists and is elected in specific situations, but you cannot simply pick a life you like. Within the general system, an asset's class determines its recovery period, and a study documents the class rather than choosing it.
Why does a 5-year asset take six years to depreciate?
The half-year convention. You get half a year of depreciation in the first year, which pushes the remaining half year into a sixth tax year at 5.76% of original basis.
Does taking 100% bonus mean MACRS no longer matters?
It still matters. MACRS determines whether an asset qualifies for bonus at all, since eligibility depends on a recovery period of 20 years or less, and it governs anything you elect out of bonus on or any state schedule you have to maintain separately.
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This article is provided by Precision Cost Segregation for general educational purposes and does not constitute tax, legal, or accounting advice. Tax outcomes depend on your specific facts, your tax rate, your passive activity position, and your entity structure. Figures shown are illustrative. Consult your CPA or tax advisor before acting, and engage a qualified professional to perform any cost segregation study. Information is current as of publication.
This article is general information, not tax or legal advice. Depreciation outcomes depend on your facts, elections, and current law — consult your CPA before acting. © 2026 Precision Cost Segregation.