MACRS recovery periods, methods and conventions in one place

Recovery period

Set by asset class. Most tangible assets map to a class in Rev. Proc. 87-56; real property periods are set by statute. Property with no class life defaults to 7 years under GDS and 12 under ADS.

The headline classes for real estate: residential rental 27.5 years, nonresidential real property 39, land improvements 15, qualified improvement property 15, personal property generally 5 or 7.

Method

3, 5, 7 and 10-year property uses 200% declining balance switching to straight line at the optimal point. 15 and 20-year property uses 150% declining balance. All real property is straight line. Any property under ADS is straight line.

Convention

This decides how much of the first year you get.

Half-year is the default for personal property: six months of depreciation regardless of when in the year you placed it in service.

Mid-quarter applies to all personal property placed in service that year if more than 40% of the aggregate basis of personal property additions falls in the fourth quarter. Real property is excluded from the test but personal property from a cost segregation study is not.

Mid-month applies to all real property: half a month in the month placed in service.

Why the mid-quarter test catches people

An owner acquires a building in November and runs a study reclassifying $900,000 into 5 and 7-year classes. That is a fourth-quarter personal property addition, and it can push every personal property addition for the whole year onto mid-quarter — including equipment purchased in March.

In a 100% bonus year the effect is muted, because bonus is taken before the convention applies to remaining basis. In a year where bonus is elected out, it is significant. Model it before December.

When ADS is mandatory

Property predominantly used outside the United States, tax-exempt use and tax-exempt bond financed property, listed property used 50% or less for qualified business use, farming businesses electing out of the interest limitation, and — the one that catches real estate owners — real property held by an electing real property trade or business under section 163(j)(7).