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## IRS Depreciation Rules — Federal Depreciation Reference
URL: https://irsdepreciationrules.com/
Description: Plain-English summaries of the IRS depreciation rules. Primary sources cited. Updated when the rules change. IRC §168, §179, §§1245/1250, Pub. 946, Pub. 5653, Form 3115.

IRS Depreciation Rules — Federal Depreciation Reference A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › DEPRECIATION REFERENCE · RECORD IDR-2026-001 · VOLUME I · 2026 EDITION FEDERAL DEPRECIATION REFERENCE · VOLUME I · 2026 EDITION The federal depreciation rules, written for the people who have to read them. A plain-English, primary-source-anchored reference to IRC §168, §179, §§1245/1250, Rev. Proc. 87-56, and the IRS publications that interpret them. Every rule is dated, sourced, and cross-linked to the worked examples that show it in operation. RULES INDEXED 7 SOURCES TRACKED 147 WORKED EXAMPLES 12 SCENARIO PAGES 38 CURRENT LAW · KEY RATES §168(k) bonus 100% §179 dollar limit $1,290,000 §179 investment cap $3,220,000 Residential rental 27.5 yrs Nonresidential real 39 yrs QIP life 15 yrs LIVING DATABASE Statutes indexed 7 Pubs summarized 5 Pending review 3 Last IRS update 2026-05-08 Next sweep 2026-08-11 Inbound citations — Editorial review by Cost Seg Smart Editorial . Errata corrected within 7 days of verification — see /methodology . § — FINDING OF RECORD + $468,840 Year-1 deduction increase from cost segregation on a $1.2M residential rental placed in service 2023 — net of straight-line baseline, before §469 limitations. CASE IDR-EX-001 · METHOD FORM 3115 · §481(a) · CALCULATION DETAIL §3 BELOW · VERIFIED 2026·05·08 § 1 · OPERATIONAL RULES Browse the rules SORT statute · updated · recovery period STATUTE TOPIC · OPERATIONAL CONSEQUENCE PRIMARY SOURCES RELATED GUIDANCE PAGES UPDATED IRC §168 MACRS schedules Class lives, recovery periods, and conventions for the Modified Accelerated Cost Recovery System. → Sets recovery period and method · interacts with §168(k) bonus and §179 expensing 26 U.S.C. §168 Treas. Reg. §1.168-1 Pub. 946 §168(k) §179 Rev. Proc. 87-56 Pub. 946 12 pp 2026-05-08 IRC §168(k) Bonus depreciation First-year additional depreciation. OBBBA restored 100% for property placed in service after Jan 19, 2025. → First-year deduction · property ≤20-yr only · stacks with §179 · OBBBA restored 100% 26 U.S.C. §168(k) TD 9993 Notice 2025-17 §168 §179 TCJA §13201 OBBBA §70302 8 pp 2026-05-08 Pub. 5653 Cost segregation Engineering reclassification of building components into shorter recovery periods. Audit Techniques Guide. → Reclassifies to 5/7/15-yr · enables §168(k) stacking · documentation drives audit defense Pub. 5653 (ATG) CCA 202612008 §168 §168(k) Form 3115 §469 9 pp 2026-04-22 Form 3115 Change in accounting method Filing under Rev. Proc. 2015-13 to claim missed depreciation. §481(a) adjustment, automatic vs. non-automatic. → Catch-up missed depreciation · §481(a) adjustment in year of change · automatic consent Rev. Proc. 2015-13 Treas. Reg. §1.446-1(e) Rev. Proc. 2026-08 §481(a) Rev. Proc. 2015-13 §168(k) Pub. 946 5 pp 2026-04-15 IRC §469 Passive activity rules Limitations on losses from passive activities. Real estate professional exception, material participation tests. → Caps passive losses · REPS exception · STR ≤7-day avg bypasses passive treatment 26 U.S.C. §469 Treas. Reg. §1.469-5T Pub. 925 REPS STR ≤7-day §1411 NIIT Pub. 925 7 pp 2026-03-30 IRC §§1245·1250 Recapture rules Ordinary-income recapture on disposition. The §1245 vs §1250 distinction and unrecaptured §1250 gain. → Ordinary-income recapture at sale · 25% unrecaptured §1250 gain · §1031 defers 26 U.S.C. §§1245, 1250 Treas. Reg. §1.1250-1 Pub. 544 §168 §1031 Pub. 544 unrecap §1250 7 pp 2026-04-03 IRC §179 Section 179 expensing Immediate expensing election. 2026 dollar limit $1.29M, investment cap $3.22M, taxable-income limited. → Immediate expensing · $1.29M dollar cap · $3.22M phase-out · taxable-income limited 26 U.S.C. §179 Treas. Reg. §1.179-1 Pub. 946 §168(k) Pub. 946 §168 phase-out 6 pp 2026-03-18 § 2 · WORKED-EXAMPLE INDEX The rules, applied to actual property all 12 worked examples → · scenarios index → CASE PROPERTY · PLACED IN SERVICE SEARCH ENTRY POINTS YR-1 DELTA IDR-EX-001 $1.2M duplex placed June 2023 duplex cost seg house hack depreciation MACRS 27.5-yr +$468,840 → IDR-EX-002 $900K STR purchased 2023 STR loophole ≤7-day average material participation +$382,500 → IDR-EX-003 12-unit MFR acquired 2025 multifamily 100% bonus restored OBBBA §70302 +$1,140,000 → IDR-EX-004 Restaurant FF&E placed 2024 §179 expensing restaurant equipment 5-yr personal property +$96,400 → IDR-EX-005 Self-storage facility 2024 land improvements 15-yr property 60% bonus 2024 +$612,300 → IDR-EX-006 Medical office QIP 2025 qualified improvement property 15-yr life 100% bonus +$284,000 → IDR-EX-007 Single-family rental 2022 (catch-up) Form 3115 §481(a) missed depreciation +$118,200 → IDR-EX-008 Office building TI 2024 tenant improvements QIP §1250 vs §1245 +$211,900 → § 3 · CASE IDR-EX-001 · DETAIL The finding, derived citation bundle · JSON export CASE IDR-EX-001 · RESIDENTIAL RENTAL · MACRS + COST SEG + 80% BONUS $1.2M duplex, residential rental, placed in service June 2023 Straight-line 27.5-yr (yr 1) $22,440 5-yr personal property $224,400 15-yr land improvements $81,600 + 80% bonus (2023) $244,800 Cost seg + bonus, year 1 $491,280 Acquisition cost (depreciable basis ex-land) $1,020,000 Land allocation 15% MACRS recovery period (residential rental) 27.5 yrs IRC §168(c) Straight-line first-year (mid-month June) $22,440 7 months ÷ 12 ÷ 27.5 Cost segregation: 5-yr reclassification (~22%) $224,400 Pub. 5653 §III.A Cost segregation: 15-yr land improvements (~8%) $81,600 Rev. Proc. 87-56 Cl. 00.3 Bonus depreciation (2023 phase-down: 80%) $244,800 TCJA §13201 (b) Form 3115 §481(a) catch-up if filed in 2026 $167,318 Rev. Proc. 2015-13 A study filed via Form 3115 in 2026 produces a §481(a) adjustment in the year of change rather than amending three prior returns. SOURCE PROVENANCE · THIS CASE PRIMARY 26 U.S.C. §168(k)(6) As amended by OBBBA §70302(a), Jan 19, 2025 TREASURY TD 9993 Final regulations on bonus depreciation, 2020 GUIDANCE Notice 2025-17 Transition rule for binding written contracts pre-Jan 20, 2025 GUIDANCE Rev. Proc. 2026-08 Automatic consent for late §168(k) elections PUBLICATION IRS Pub. 946 (2025 ed.) How to Depreciate Property, OBBBA-incorporated § 4 · REVISION RECORD Recent revisions RSS · full changelog → DATE PATH SUBSTANTIVE CHANGE REVIEWER REV 2026-05-08 /bonus-depreciation/ Updated §168(k) page to reflect IRS Notice 2026-12 clarifying placed-in-service date for binding written contracts. EDITORIAL v1.0.0 2026-04-22 /obbba-2025/ Added Treasury proposed regulations REG-114923-25 to the OBBBA implementation timeline. EDITORIAL v0.9.4 2026-04-15 /form-3115/ Revised §481(a) adjustment worked example for the new automatic consent under Rev. Proc. 2026-08. EDITORIAL v0.9.3 2026-04-03 /class-lives/table/ Reviewed all 147 asset class entries against Rev. Proc. 87-56 as updated through 2026-Q1. No changes required. EDITORIAL v0.9.2 2026-03-28 /qualified-improvement-property/ Added Chief Counsel Advice 202612008 on QIP eligibility for owner-occupied portions. EDITORIAL v0.9.1 EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## MACRS — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/macrs/
Description: The depreciation system required by IRC §168 for most tangible property placed in service after 1986. Class lives, recovery periods, GDS vs ADS, and the three averaging conventions.

MACRS — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › MACRS · RECORD IDR-MACRS · VOLUME I · 2026 EDITION IRC §168 · Rev. Proc. 87-56 · Treas. Reg. §1.168-1 MACRS — Modified Accelerated Cost Recovery System The depreciation system required by IRC §168 for most tangible property placed in service after 1986. Class lives, recovery periods, GDS vs ADS, and the three averaging conventions. PRIMARY SOURCES 26 U.S.C. §168 Treas. Reg. §1.168-1 Pub. 946 REVIEWED Cost Seg Smart Editorial LAST REVIEW · 2026-05-08 NEXT SWEEP · 2026-08-11 ON THIS PAGE Plain-English definition What the law says Class lives and recovery periods GDS vs ADS Conventions Bonus depreciation interaction §179 interaction Recapture interaction Common errors Sources RELATED bonus depreciation section 179 cost segregation form 3115 Plain-English definition MACRS — the Modified Accelerated Cost Recovery System — is the depreciation method required under IRC §168 for most tangible property placed in service after December 31, 1986. It assigns a class life and recovery period to each asset, applies one of three averaging conventions (half-year, mid-quarter, or mid-month), and uses either the declining-balance method (for shorter-lived property) or the straight-line method (for real property). MACRS is the default. The General Depreciation System (GDS) applies unless the Alternative Depreciation System (ADS) is required or elected. What the law says The statute reads, in part: 26 U.S.C. § 168(a) “Except as otherwise provided in this section, the depreciation deduction provided by section 167(a) for any tangible property shall be determined by using— (1) the applicable depreciation method, (2) the applicable recovery period, and (3) the applicable convention.” Source: Cornell LII · IRS.gov The three “applicable” determinations — method, recovery period, and convention — are the entire framework. Every classification question under MACRS reduces to picking among these three. Class lives and recovery periods Class life is assigned by Rev. Proc. 87-56 , which lists ~150 asset classes covering essentially every business property type. Recovery period is then a function of class life: Class life (Rev. Proc. 87-56) GDS recovery period Typical examples 4 years or less 3 years Race horses over 2, taxis 5–10 years 5 years Automobiles, computers, light trucks, dairy cattle, qualified film/TV 10–16 years 7 years Office furniture, fixtures, agricultural machinery 16–20 years 10 years Vessels, single-purpose agricultural structures 20–25 years 15 years Land improvements (parking lots, sidewalks, landscaping), restaurant property, QIP 25+ years (real property) 27.5 yrs Residential rental property 25+ years (real property) 39 yrs Nonresidential real property (commercial buildings) The full classification table (147 entries from Rev. Proc. 87-56) is available at /class-lives/table/ . GDS vs ADS GDS (General) ADS (Alternative) Method Declining-balance, switching to straight-line Straight-line Recovery periods 3, 5, 7, 10, 15, 20, 27.5, 39 years Longer than GDS for most classes; 30 yrs residential, 40 yrs nonresidential When required Default — applies unless ADS is required (a) Tax-exempt use property; (b) listed property used ≤50% for business; (c) property used outside U.S.; (d) farming property (§168(g)(7)); (e) §163(j) election When elected (Cannot elect into GDS — it’s the default) Optional for any depreciable property — irrevocable election made annually Real-property trade or business election under §163(j): A taxpayer that elects out of the business-interest limitation under §163(j)(7) must use ADS for nonresidential real property (40 yrs), residential rental property (30 yrs), and QIP (20 yrs). This election is irrevocable and forecloses 100% bonus depreciation on the affected classes for the life of the property. Conventions The convention determines how much depreciation is taken in the first and last partial years. Half-year convention. Most personal property (5-year, 7-year). All property placed in service during the year is treated as placed in service at the midpoint of the year — half a year of depreciation in year 1, half a year in the disposition year. Mid-quarter convention. If more than 40% of total depreciable basis (excluding real property and listed property) is placed in service in Q4, each asset is treated as placed in service at the midpoint of its actual quarter: Q1: 87.5% of full-year depreciation Q2: 62.5% Q3: 37.5% Q4: 12.5% The mid-quarter test is calculated annually and on a property-class basis — it’s possible to be in the half-year convention for 5-year property and the mid-quarter convention for 7-year property in the same year, depending on placement timing. Mid-month convention. Required for all real property (27.5-yr and 39-yr classes). Each property is treated as placed in service at the midpoint of the calendar month — yielding 11.5 months of depreciation in year 1 if placed in service on January 1, 0.5 months if placed in service on December 31. Bonus depreciation interaction IRC §168(k) bonus depreciation is layered on top of MACRS — not in lieu of it. The mechanics: Determine the property’s MACRS class life and recovery period under §168. If the recovery period is 20 years or less and the property otherwise qualifies, take §168(k) bonus depreciation on the full basis in year 1 (currently 100% for property placed in service after January 19, 2025, per OBBBA). The remaining basis (after bonus, typically $0 at 100%) depreciates over the MACRS recovery period using the applicable method and convention. Bonus depreciation does not apply to 27.5-year residential rental or 39-year nonresidential real property — those classes exceed the 20-year cap. But the 15-year and shorter components identified through cost segregation on those buildings do qualify. §179 interaction IRC §179 immediate expensing operates separately from MACRS. The taxpayer elects §179 expensing on qualifying property up to the annual dollar limit ($1.29M for 2026, phased out above $3.22M of investment). The §179 deduction is taken first, then bonus depreciation, then MACRS on the residual basis. Where the same property qualifies for both §179 and 100% bonus, the choice is largely about taxable-income limitations: §179 cannot create a net loss (excess carries forward), while bonus depreciation can. Recapture interaction When MACRS property is disposed of, depreciation recapture applies under IRC §§1245 or 1250 . The split: Personal property (5-year, 7-year classes, and the components reclassified into them through cost segregation): §1245 recapture at ordinary income rates on the full depreciation taken. Real property (27.5-year, 39-year classes): §1250 recapture, with the bulk of the depreciation taxed as “unrecaptured §1250 gain” at a 25% maximum rate. The §1245 vs §1250 distinction is the core reason cost segregation is consequential at sale — components classified into accelerated buckets generate ordinary-income recapture rather than capital-gain treatment. Common errors Five recurring misclassifications, each cited in the IRS Cost Segregation Audit Techniques Guide : Treating tenant-improvement allowances as the landlord’s basis. If the landlord pays cash to the tenant for improvements the tenant constructs and owns, the landlord has no depreciable basis. The tenant captures the depreciation. Misclassifying decorative finishes as 39-year structural. Decorative wall coverings, accent lighting, and removable interior partitions qualify as 5-year personal property under Treas. Reg. §1.48-1(c) when they pass the permanence test. The IRS ATG Chapter 3 enumerates the test. Land improvements treated as part of the 39-year building. Parking lots, sidewalks, site lighting, monument signage, fencing, and landscaping are 15-year land improvements under Rev. Proc. 87-56 Class 00.3 — not part of the building’s 39-year basis. Section 1245 vs §1250 recapture confusion on sale. Selling property after a cost segregation study without correctly bifurcating §1245 recapture (on the 5/7/15-year reclassified components) from §1250 recapture (on the remaining building basis) is the single most common cost-seg disposition error. Failing to file Form 3115 for missed depreciation. When a cost segregation study identifies depreciation that should have been claimed in prior years, Form 3115 under Rev. Proc. 2015-13 captures the §481(a) adjustment in the year of change. Amending three prior returns is not the alternative — it’s the wrong mechanism. Sources Statute: 26 U.S.C. § 168 — Cornell LII · IRS Pub. 946 Regulations: Treas. Reg. § 1.168-1 through § 1.168-6 (and § 1.48-1(c) for the permanence test on personal property classification) Revenue procedures: Rev. Proc. 87-56 (asset class table); Rev. Proc. 2015-13 (Form 3115 procedures); Rev. Proc. 2026-08 (current automatic-consent procedures for §168(k) late elections) IRS publications: Pub. 946 — How to Depreciate Property ; Pub. 5653 — Cost Segregation Audit Techniques Guide ; Pub. 527 — Residential Rental Property Cases: Hospital Corporation of America v. Commissioner , 109 T.C. 21 (1997) — the seminal cost segregation case interpreting MACRS personal/real property classification Working through a cost segregation study under MACRS? The engineering classification of building components into the 5-, 7-, and 15-year MACRS buckets is the actual mechanism cost segregation operates on. A working example of how each MACRS class maps to component-level reclassification on a commercial property shows the process end-to-end. EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Bonus Depreciation — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/bonus-depreciation/
Description: First-year additional depreciation under IRC §168(k). The One Big Beautiful Bill Act, signed January 19, 2025, restored 100% bonus depreciation permanently for qualifying property.

Bonus Depreciation — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › BONUS DEPRECIATION · RECORD IDR-BONUS-DE · VOLUME I · 2026 EDITION IRC §168(k) · Treas. Reg. §1.168(k)-2 · TD 9993 IRC §168(k) — Bonus Depreciation First-year additional depreciation under IRC §168(k). The One Big Beautiful Bill Act, signed January 19, 2025, restored 100% bonus depreciation permanently for qualifying property. PRIMARY SOURCES 26 U.S.C. §168(k) TD 9993 Notice 2025-17 REVIEWED Cost Seg Smart Editorial LAST REVIEW · 2026-05-08 NEXT SWEEP · 2026-08-11 ON THIS PAGE Plain-English definition What the law says Current rate and history Qualifying property Real-property strategy: cost segregation as the bridge §179 interaction Election to opt out Recapture on disposition Common errors Sources RELATED macrs section 179 cost segregation form 3115 Plain-English definition Bonus depreciation under IRC §168(k) is an additional first-year depreciation deduction equal to a percentage of the adjusted basis of qualifying property. The current rate is 100% for property placed in service after January 19, 2025 , restored by the One Big Beautiful Bill Act (OBBBA) signed that date. Bonus depreciation is layered on top of MACRS , not in lieu of it. The taxpayer takes the §168(k) deduction first, then depreciates any remaining basis under MACRS over the recovery period. What the law says 26 U.S.C. § 168(k)(1) “In the case of any qualified property— (A) the depreciation deduction provided by section 167(a) for the taxable year in which such property is placed in service shall include an allowance equal to the applicable percentage of the adjusted basis of the qualified property, and (B) the adjusted basis of the qualified property shall be reduced by the amount of such deduction before computing the amount otherwise allowable as a depreciation deduction under this chapter for such taxable year and any subsequent taxable year.” Source: Cornell LII · IRS.gov (as amended by OBBBA §70302(a)) Current rate and history The “applicable percentage” in §168(k)(1)(A) has changed eight times since the provision was enacted in 2002: Period Bonus depreciation rate Authority Sep 11, 2001 – Sep 10, 2004 30% Job Creation and Worker Assistance Act 2002 May 6, 2003 – Dec 31, 2004 50% Jobs and Growth Tax Relief Reconciliation Act 2003 2008–2017 50% (with brief 100% windows) Various extender acts; PATH Act 2015 2018–2022 100% Tax Cuts and Jobs Act §13201 (2017) 2023 80% TCJA phase-down 2024 60% TCJA phase-down Jan 1 – Jan 19, 2025 40% TCJA phase-down (in effect briefly) After Jan 19, 2025 (permanent) 100% OBBBA §70302(a) The OBBBA restoration is structured as a permanent restoration under current law. There is no scheduled phase-down. A future Congress could amend, but no sunset is in current law. For the full multi-decade timeline including the 2008 Economic Stimulus Act, the 2010 Tax Relief Act, and PATH Act bonus extensions, see /bonus-depreciation/history/ . Qualifying property Property qualifies for §168(k) bonus depreciation if it meets four tests: Recovery period of 20 years or less. This is the central limit — 27.5-year residential rental and 39-year nonresidential real property are out. 5-year, 7-year, 15-year, and 20-year property are in. MACRS depreciable property under §168(a) or computer software under §167(f)(1)(B). Property depreciated under ADS (alternative depreciation system) does not qualify. Original use begins with the taxpayer, or used property meeting the acquisition tests. Post-TCJA, used property qualifies as long as: (a) the taxpayer or predecessor did not previously own it, and (b) it was not acquired from a related party or as a component of a Section 351 transaction. Placed in service during the applicable period. The placed-in-service test is when the asset is ready and available for its intended use — not the date of acquisition or contracting. The fourth test is where the binding-written-contract transition rule under Notice 2025-17 matters: property under binding written contract on January 19, 2025 may use the pre-OBBBA rate that applied at the contract date, rather than the OBBBA 100% rate, if the taxpayer so elects. Real-property strategy: cost segregation as the bridge The §168(k) 20-year-or-less limit is why cost segregation matters disproportionately for real estate. A $1.2M residential rental property’s basis is mostly 27.5-year structural — which does not qualify for bonus depreciation. But an engineered cost segregation study typically reclassifies 22–30% of the basis into 5-year personal property and 8–12% into 15-year land improvements. Those reclassified components qualify for 100% bonus depreciation in year 1. The arithmetic on a $1.2M duplex placed in service June 2023 (the worked example below): Straight-line first-year deduction (mid-month June, 7 months): $22,440 Cost-segregation reclassification (5-yr personal property, ~22% of basis): $224,400 Cost-segregation reclassification (15-yr land improvements, ~8% of basis): $81,600 Bonus depreciation on the accelerated buckets (2023 rate: 80%): $244,800 Total year-1 deduction with cost seg + bonus: $491,280 Under OBBBA 100% bonus, the same property placed in service after January 19, 2025 produces a larger year-1 deduction because the bonus rate is 100% rather than 80%. The structural arithmetic doesn’t change; the multiplier does. §179 interaction IRC §179 immediate expensing and §168(k) bonus depreciation coexist. Where the same property qualifies for both: §179 election is applied first, up to the dollar limit ($1.29M for 2026, phased out above $3.22M investment) and the taxable-income limitation. Bonus depreciation under §168(k) applies to the remaining basis. MACRS depreciation under §168 applies to whatever basis remains after §179 and bonus (typically $0 at 100% bonus). The key practical distinction: §179 cannot create a net loss — the deduction is limited to taxable income, with excess carried forward. Bonus depreciation can create a net loss — there is no taxable-income cap on §168(k). Real estate professionals (REPs) using §168(k) to create losses that offset active income through the §469 REPS exception rely specifically on this distinction. Election to opt out The election out of §168(k) is made on a class-by-class basis. For each MACRS class (5-yr, 7-yr, 15-yr, 20-yr), the taxpayer can: Take bonus depreciation at the current rate (default) Elect out — bonus is skipped for that class for that year; MACRS depreciation applies to the full basis over the recovery period The election is made by attaching a statement to the original tax return. It is irrevocable for that class for that year without IRS consent under Rev. Proc. 2015-13. Common reason to elect out: a taxpayer who expects significantly higher marginal rates in future years prefers MACRS depreciation spread across the recovery period rather than concentrated in year 1. Recapture on disposition Bonus depreciation taken under §168(k) is recaptured when the property is disposed of. The recapture treatment follows the property’s MACRS class: 5-year and 7-year property: §1245 recapture at ordinary income rates on the full depreciation taken (including the bonus portion). 15-year land improvements: §1245 recapture as well — these qualify as §1245 property by reference to §168(e)(3). 20-year property: §1245. There is no special “bonus depreciation recapture” rule — it’s all §1245 ordinary-income recapture on the depreciation that was taken. The §1245 vs §1250 distinction is what determines the rate. Common errors Treating 100% bonus as automatic for any new property. The 20-year-or-less recovery-period test eliminates 27.5-year and 39-year real property from direct eligibility. Cost segregation is required to surface the qualifying components. Missing the placed-in-service vs acquisition date distinction. Property purchased in 2024 and placed in service in 2025 follows the 2025 rate (100%), not the 2024 rate (60%). The placed-in-service date controls. Filing bonus depreciation late without Form 3115. If §168(k) was not claimed in the year of placement, the catch-up requires Form 3115 under Rev. Proc. 2015-13 — not an amended return. Rev. Proc. 2026-08 provides current automatic consent procedures for late §168(k) elections. Bonus on ADS-elected property. A taxpayer that elected out of §163(j) interest limitations under §163(j)(7) is required to depreciate certain real property classes under ADS. ADS-classified property is not eligible for §168(k). This election is a foreclosure of future bonus depreciation that should be quantified before making the election. Confusing §168(k) with §179. Both are first-year deductions, but §179 is an election with dollar/investment limits and a taxable-income cap; §168(k) is automatic (subject to the opt-out election) with no income cap. Sources Statute: 26 U.S.C. § 168(k) — Cornell LII ; as amended by OBBBA §70302(a) (January 19, 2025) Regulations: Treas. Reg. § 1.168(k)-2 (final regulations under TD 9993, September 2020) IRS guidance: Notice 2025-17 (binding-contract transition rule); Rev. Proc. 2026-08 (automatic consent for late §168(k) elections); Notice 2026-12 (placed-in-service date for binding contracts) Publications: IRS Pub. 946 — How to Depreciate Property (2025 edition, OBBBA-incorporated) Legislative: Tax Cuts and Jobs Act of 2017 § 13201 (original TCJA bonus rules); One Big Beautiful Bill Act § 70302 (2025 restoration) Need to apply 100% bonus depreciation to a specific property? The §168(k) calculation depends on the property’s MACRS class, the placed-in-service date, and whether cost segregation has identified eligible components. A property-by-property worked calculation shows the year-1 bonus depreciation impact alongside the underlying classification. EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Section 179 Expensing — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/section-179/
Description: Immediate expensing of qualifying property up to an annual dollar limit. The 2026 limit is $1,290,000, phased out above $3,220,000 of qualifying investment, capped by taxable income.

Section 179 Expensing — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › SECTION 179 EXPENSING · RECORD IDR-SECTION- · VOLUME I · 2026 EDITION IRC §179 · Treas. Reg. §1.179-1 IRC §179 — Election to Expense Qualifying Property Immediate expensing of qualifying property up to an annual dollar limit. The 2026 limit is $1,290,000, phased out above $3,220,000 of qualifying investment, capped by taxable income. PRIMARY SOURCES 26 U.S.C. §179 Treas. Reg. §1.179-1 Pub. 946 REVIEWED Cost Seg Smart Editorial LAST REVIEW · 2026-03-18 NEXT SWEEP · 2026-09-15 ON THIS PAGE Plain-English definition What the law says Qualifying property The three limitations §179 vs §168(k) bonus depreciation Special rules Recapture treatment at disposition Common errors Sources RELATED bonus depreciation macrs form 3115 Plain-English definition Section 179 of the Internal Revenue Code lets a taxpayer elect to treat the cost of qualifying property as an expense in the year of purchase, rather than depreciating it over the MACRS recovery period . The election is bounded by an annual dollar limit, an investment phase-out, and a taxable-income cap. For 2026, the dollar limit is $1,290,000 . The phase-out begins at $3,220,000 of qualifying investment placed in service during the year and ends at $4,510,000. What the law says 26 U.S.C. § 179(a) “A taxpayer may elect to treat the cost of any section 179 property as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service.” Source: Cornell LII · IRS.gov The election is made on Form 4562 attached to the tax return for the year the property is placed in service. The election is revocable only with IRS consent under Rev. Proc. 2015-13. Qualifying property §179 property includes tangible personal property used in a trade or business, plus several specific real-property categories added by the TCJA: Category §179 eligible? Equipment, machinery, vehicles, computers, office furniture Yes Off-the-shelf computer software Yes Qualified Improvement Property (QIP) Yes Roofs on nonresidential buildings (post-2017) Yes HVAC on nonresidential buildings (post-2017) Yes Fire protection and alarm systems on nonresidential buildings Yes Security systems on nonresidential buildings Yes Real property (buildings, structural components other than the four categories above) No Property used in lodging (other than hotels/motels) No (unless §179(d)(1) exception applies) Property used outside the U.S. No The roof/HVAC/fire/security categories under §179(f) are a meaningful expansion — a small business that replaces a $200K HVAC system can §179-expense it, where pre-TCJA the same expenditure would have depreciated over 39 years. The three limitations §179 is bounded by three separate limits that must each be applied: 1. Dollar limit ($1,290,000 for 2026) The maximum aggregate §179 deduction across all qualifying property in a single year. Inflation-indexed under §179(b)(6). 2. Investment phase-out (begins at $3,220,000) If the taxpayer places more than $3,220,000 of qualifying property in service during the year, the §179 dollar limit is reduced dollar-for-dollar above that threshold. At $4,510,000 of investment, §179 is fully phased out. The phase-out applies on a total investment basis, not a §179-elected basis. Even if a taxpayer elects §179 on only $500K of property, placing $4M in service triggers the full $780K phase-out, leaving $510K of §179 capacity. 3. Taxable-income limit §179 cannot create a net loss. The deduction is limited to the taxpayer’s aggregate taxable income from the active conduct of any trade or business — across all activities, not just the activity in which the §179 property is used. Excess §179 carries forward indefinitely under §179(b)(3) and can be used in any future year when sufficient taxable income exists. §179 vs §168(k) bonus depreciation The two regimes are often compared because they both produce first-year deductions. The key distinctions: Feature §179 §168(k) bonus Dollar cap $1,290,000 (2026) None Investment phase-out $3,220,000–$4,510,000 None Taxable-income limit Yes — cannot create loss None — can create loss Election required Yes (Form 4562) Default — opt-out election required to skip Asset-by-asset election Yes — choose specific assets Class-by-class only Eligible property Personal property + QIP + 4 building components Personal property, QIP, certain real property components — 20-yr or less recovery Carryforward Excess carries forward N/A — no excess When §179 is the better choice: Small-business owner with stable income near the §179 dollar limit Wanting to elect specific assets (e.g., §179 on the vehicle, bonus on the equipment) Investment well below the $3.22M phase-out threshold When bonus is the better choice: Investment exceeds the §179 phase-out (any §179 election will be reduced or eliminated) Real estate professional using depreciation to create active-income offsets Cost segregation studies on real estate where the bulk of accelerated buckets are 15-year property Large equipment purchases above the §179 dollar limit In practice, both are typically used in combination: §179 elected on the optimal mix of assets (often older or shorter-life property where §179 specificity is useful), with §168(k) bonus applied to the residual. Special rules Vehicle deduction limits. Passenger automobiles weighing 6,000 lbs or less are subject to the §280F luxury auto caps that limit annual depreciation (including §179 and bonus). Heavy SUVs (>6,000 lbs gross vehicle weight) have their own §179 cap of $30,500 for 2026 — between the regular §179 limit and the §280F luxury caps. Trade-in or like-kind exchange. Pre-TCJA, like-kind exchanges of personal property received nonrecognition treatment under §1031. Post-TCJA, only real property qualifies for §1031, so personal property exchanges are taxable events — and the new property qualifies for §179 (and bonus) on its full basis. Recapture. §179 deductions are recaptured if business use of the property drops to 50% or less during the recovery period. The recapture amount is the §179 deduction minus the depreciation that would have been allowed under MACRS without the §179 election. Recapture is reported on Form 4797. Recapture treatment at disposition When §179 property is sold or otherwise disposed of, the depreciation taken (including the §179 expensing) is recaptured under IRC §1245 . The gain on disposition is treated as ordinary income up to the cumulative §179 + depreciation taken, with any excess as capital gain. There is no special “§179 recapture” — it follows the normal §1245 mechanics. Common errors Treating §179 as automatic. Unlike bonus depreciation, §179 must be elected on Form 4562. Skipping the election forfeits the deduction. Forgetting the taxable-income limit. A taxpayer expecting to use §179 on a $1.29M equipment purchase but with only $400K of taxable income can deduct only $400K — the remaining $890K carries forward. Modeling the §179 deduction without the income cap overstates the immediate benefit. §179 on real property where it doesn’t qualify. Roofs, HVAC, fire, and security are eligible — but only on nonresidential buildings. The same components on a residential rental are not §179-eligible (though they may still qualify for 100% bonus depreciation if reclassified to a 15-year MACRS life through cost segregation ). Investment phase-out miscalculation. The phase-out reduces §179 by total qualifying-property investment , not §179-elected amount. A taxpayer placing $5M in qualifying property in service can’t elect §179 on $1.29M — the phase-out has already zeroed out the dollar limit. Mixing §179 and bonus on the same asset without optimization. Where §179 is elected on an asset, bonus applies to the residual basis. The order matters for taxable-income optimization — and the optimal split is sometimes counter-intuitive. Sources Statute: 26 U.S.C. § 179 — Cornell LII Regulations: Treas. Reg. § 1.179-1 through § 1.179-6 IRS publications: Pub. 946 — How to Depreciate Property ; Pub. 535 — Business Expenses; Form 4562 Instructions Inflation adjustments: Rev. Proc. 2025-32 (2026 dollar and phase-out figures) Modeling §179 + bonus together on a specific property? The two deductions stack but in a specific order, and the optimal allocation depends on the taxpayer’s other income and projected future-year position. A worked depreciation model for a W-2 high-income filer shows how the §179 and §168(k) sequencing affects current-year tax owed. EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Form 3115 — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/form-3115/
Description: The procedural mechanism for capturing missed depreciation from prior years. Filed under Rev. Proc. 2015-13 with automatic IRS consent. Produces a §481(a) adjustment in the year of change.

Form 3115 — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › FORM 3115 · RECORD IDR-FORM-311 · VOLUME I · 2026 EDITION IRC §481(a) · Rev. Proc. 2015-13 · Treas. Reg. §1.446-1(e) Form 3115 — Application for Change in Accounting Method The procedural mechanism for capturing missed depreciation from prior years. Filed under Rev. Proc. 2015-13 with automatic IRS consent. Produces a §481(a) adjustment in the year of change. PRIMARY SOURCES Rev. Proc. 2015-13 Treas. Reg. §1.446-1(e) Rev. Proc. 2026-08 REVIEWED Cost Seg Smart Editorial LAST REVIEW · 2026-04-15 NEXT SWEEP · 2026-10-15 ON THIS PAGE Plain-English definition What §481(a) does Cost segregation use case Automatic vs non-automatic consent Mechanics of the §481(a) adjustment Worked example Common errors Sources RELATED cost segregation macrs bonus depreciation Plain-English definition Form 3115 — Application for Change in Accounting Method — is the IRS form used to change the method by which an item is treated on the tax return. For depreciation purposes, Form 3115 is the mechanism by which: Missed depreciation from prior years is captured (cost segregation studies, late §168(k) bonus elections, MACRS class corrections) The cumulative correction is taken as a §481(a) adjustment in the year of change Prior returns are not amended — the adjustment is in a single year, prospective The procedural authority is Rev. Proc. 2015-13 , which establishes both automatic-consent and non-automatic-consent paths. What §481(a) does 26 U.S.C. § 481(a) “In computing the taxpayer’s taxable income for any taxable year (referred to in this section as the ‘year of the change’)— (1) if such computation is under a method of accounting different from the method under which the taxpayer’s taxable income for the preceding taxable year was computed, then (2) there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted.” Source: Cornell LII · IRS.gov The §481(a) adjustment is the cumulative difference between (a) total depreciation that would have been allowed under the new method from the property’s placed-in-service date through the year of change, and (b) total depreciation actually claimed under the old method during the same period. For missed depreciation, this is almost always a negative §481(a) — a deduction in the year of change capturing all the depreciation that should have been taken but wasn’t. Cost segregation use case The most common Form 3115 use in real estate: a property is acquired in year X, depreciated as 39-year nonresidential or 27.5-year residential without cost segregation. In year X+3 (or X+5, etc.), an engineering cost segregation study reclassifies portions of the building into 5-year, 7-year, and 15-year property. The §481(a) adjustment captures: Catch-up MACRS depreciation on the newly-reclassified components for years X, X+1, X+2 (i.e., the additional depreciation that would have been taken in those years under the 5/7/15-year schedules instead of 39/27.5) Catch-up §168(k) bonus depreciation at the rates that applied to each placed-in-service year (e.g., 100% for 2018–2022 property, 80% for 2023 property, 60% for 2024 property) Combined into a single deduction reported on the year-X+3 tax return The taxpayer does not amend years X, X+1, or X+2. The §481(a) adjustment is the entire mechanism. The Form 3115 designated change number (DCN) for a depreciation method change associated with cost segregation is DCN 7 under Rev. Proc. 2015-13. Automatic vs non-automatic consent Automatic consent Non-automatic consent IRS approval Deemed approved on proper filing Must be approved in advance User fee None $14,200 (2026) Filing deadline With original return (incl. extensions) Before year of change ends (typically) Filing location One copy with return + one copy to Ogden, UT One copy with consent application Common changes Most depreciation, cost seg, §168(k) catch-up, repair regs Specialized changes not on the auto-consent list Risk Lower — DCN-listed changes have defined procedures Higher — IRS reviews and may decline For cost segregation under DCN 7, automatic consent is the standard path. Rev. Proc. 2026-08 is the current automatic-consent procedures document covering §168(k) late elections. Mechanics of the §481(a) adjustment The §481(a) calculation runs in two pieces: Piece 1: New-method cumulative depreciation Calculate what total depreciation would have been from placed-in-service date through the year before the year of change, using: The new MACRS classifications (5-yr, 7-yr, 15-yr for the cost-segregated components) The §168(k) bonus rate that applied in each placed-in-service year (not the current rate) The applicable conventions (half-year, mid-quarter, mid-month per the property type) Piece 2: Old-method cumulative depreciation Calculate what total depreciation was actually claimed under the old method (typically straight-line 27.5 or 39 years) from placed-in-service date through the same period. The adjustment §481(a) adjustment = (Piece 1) − (Piece 2) If positive (rare for missed depreciation), it’s income — typically spread over four years. If negative (the usual case), it’s a deduction in the year of change. Worked example Property: $1.2M residential rental duplex, placed in service June 2023, owned by an LLC taxed as a partnership. Year of change: 2026 (cost segregation study performed in 2026, applied retroactively). Old method (claimed 2023, 2024, 2025): straight-line 27.5-yr, mid-month June convention. 2023: $22,440 (7 months mid-month) 2024: $38,540 2025: $38,540 Cumulative through 2025: $99,520 New method (would have been claimed 2023, 2024, 2025): with engineering cost segregation reclassifying 22% to 5-yr personal property, 8% to 15-yr land improvements, plus §168(k) bonus at the rate in effect each year. The 2023 placed-in-service year captures 80% bonus on the accelerated buckets (the 2023 §168(k) rate, not the current 100%): 2023 bonus on 5-yr (22% × $1.02M × 80%) = $179,520 2023 bonus on 15-yr (8% × $1.02M × 80%) = $65,280 2023 MACRS on remaining 5-yr basis = $4,488 (residual at 5-yr DDB w/ half-year) 2023 MACRS on remaining 15-yr basis = $544 (residual at 15-yr 150%DB w/ half-year) 2023 MACRS on 27.5-yr basis (the 70% structural portion) = $15,708 (mid-month June) 2023 new-method total: $265,540 2024 new-method: $32,234 (MACRS on residual + structural) 2025 new-method: $30,002 Cumulative through 2025 under new method: $327,776 §481(a) adjustment: $327,776 − $99,520 = −$228,256 (negative = deduction) The 2026 return reports a $228,256 §481(a) deduction. The 2026 forward-looking depreciation continues on the new schedule. No 2023, 2024, or 2025 returns are amended. Common errors Filing Form 3115 with the wrong tax year. Form 3115 must be filed with the year of change return — not the year following. Filing in year X+4 to capture a change that should have been made in year X+3 misses the window. Using the current §168(k) rate retroactively. The §481(a) calculation uses the bonus rate that applied in each placed-in-service year, not the current 100% rate. A 2023 placed-in-service property gets 80% bonus in the §481(a), even if filed in 2026. Skipping the Ogden copy. Automatic-consent Form 3115 requires two copies — one attached to the original return, one mailed separately to the IRS in Ogden, UT. Missing the Ogden copy can invalidate the change. Amending instead of filing 3115. A cost segregation study on a property held more than one year is a method change, not an error. Filing amended returns for the prior years is the wrong mechanism and can be disallowed by the IRS as failure to follow the prescribed §481(a) procedure. Treating §481(a) as eligible for §168(k) bonus. The §481(a) adjustment captures depreciation that should have been taken under the new method, including bonus depreciation at the historic rates. The adjustment itself is not an additional asset placed in service in the year of change — there’s no separate bonus depreciation on the §481(a). Designated Change Number (DCN) errors. The DCN identifies the specific change being made. DCN 7 (cost segregation), DCN 86 (TPR-related changes), DCN 199 (late §168(k) election) — using the wrong DCN can result in IRS rejection. The Rev. Proc. 2015-13 Appendix lists all current automatic-consent DCNs. Sources Statute: 26 U.S.C. § 481(a) — Cornell LII Regulations: Treas. Reg. § 1.446-1(e) (method-change procedures) Revenue procedures: Rev. Proc. 2015-13 (master automatic-consent procedures, as updated); Rev. Proc. 2026-08 (current §168(k) automatic consent) Forms: IRS Form 3115 (current revision) + Instructions for Form 3115 Publications: Pub. 946 — How to Depreciate Property , Ch. 1 on changes in accounting method Filing Form 3115 for missed depreciation on a specific property? The §481(a) adjustment calculation depends on the property’s full history — placed-in-service date, original classifications, prior-year bonus rates, and the cost segregation reclassification proposed. A worked Form 3115 §481(a) calculator shows the per-property adjustment with documented sources. EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Recapture — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/recapture/
Description: Ordinary-income recapture on the disposition of depreciable property. The §1245 vs §1250 distinction determines the rate. Unrecaptured §1250 gain is taxed at a 25% maximum.

Recapture — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › RECAPTURE · RECORD IDR-RECAPTUR · VOLUME I · 2026 EDITION IRC §1245 · IRC §1250 · Treas. Reg. §1.1250-1 IRC §§1245 and 1250 — Depreciation Recapture Ordinary-income recapture on the disposition of depreciable property. The §1245 vs §1250 distinction determines the rate. Unrecaptured §1250 gain is taxed at a 25% maximum. PRIMARY SOURCES 26 U.S.C. §§1245, 1250 Treas. Reg. §1.1250-1 Pub. 544 REVIEWED Cost Seg Smart Editorial LAST REVIEW · 2026-04-03 NEXT SWEEP · 2026-10-03 ON THIS PAGE Plain-English definition The §1245 vs §1250 distinction §1245 mechanics §1250 mechanics Why cost segregation changes the recapture math §1031 like-kind exchanges and recapture Installment sales and recapture Common errors Sources RELATED cost segregation macrs bonus depreciation Plain-English definition Depreciation recapture is the rule that, on disposition of depreciable property, some or all of the prior-year depreciation deductions are taxed back — at ordinary income rates (§1245) or a special 25% rate (unrecaptured §1250 gain). The IRC §§1245 and 1250 distinction governs which rate applies. Recapture is calculated on disposition , not as the property is depreciated. It is the timing reversal that makes depreciation a deferral rather than a permanent exclusion. The §1245 vs §1250 distinction This is the core concept. The distinction tracks the type of property: §1245 property §1250 property Property type Personal property; tangible personal property used in trade or business Real property — buildings, structural components, real-property improvements MACRS classes 5-yr, 7-yr, 10-yr, 15-yr land improvements , 20-yr 27.5-yr residential rental, 39-yr nonresidential Recapture amount Full depreciation taken Excess of accelerated over straight-line (almost always zero under MACRS) Tax rate on recapture Ordinary income rates (up to 37% federal) Ordinary income rates on the §1250 recapture portion Special rule — Unrecaptured §1250 gain taxed at 25% maximum (the bulk of typical gain) The classification is determined by the property’s MACRS class , which is determined by what the property is — not what the taxpayer wishes to call it. See also the glossary entries for §1245 property and §1250 property . §1245 mechanics 26 U.S.C. § 1245(a)(1) “…the amount by which the lower of— (A) the recomputed basis of the property, or (B) [the amount realized on sale]… exceeds the adjusted basis of such property shall be treated as ordinary income.” Source: Cornell LII · IRS.gov The §1245 calculation: Adjusted basis = original cost − depreciation taken (including §168(k) bonus and §179 expensing) Recomputed basis = adjusted basis + depreciation taken = original cost §1245 recapture = lesser of (sale price − adjusted basis) or (recomputed basis − adjusted basis) — i.e., the gain up to total depreciation taken, treated as ordinary income Capital gain = sale price − recomputed basis (if positive) — long-term capital gain A simple example: Equipment purchased for $100,000, fully depreciated (including §179 and bonus) to $0 adjusted basis. Sold for $30,000. Recapture = $30,000 (all gain up to total depreciation). Capital gain = $0. If sold for $130,000 instead: Recapture = $100,000 (total depreciation taken); Capital gain = $30,000 (excess over original cost). §1250 mechanics 26 U.S.C. § 1250(a)(1)(A) “…there shall be treated as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231 the applicable percentage of the lower of— (i) the additional depreciation in respect of the property, or (ii) the excess of— (I) the amount realized…” Source: Cornell LII · IRS.gov The §1250 calculation has two parts: §1250 recapture (ordinary income) §1250 recapture is the excess of accelerated depreciation over what straight-line would have produced. Under MACRS, real property (27.5-yr residential, 39-yr nonresidential) uses straight-line — so accelerated exceeds straight-line by zero . §1250 ordinary-income recapture is almost always zero for property depreciated under MACRS. The exception: §168(k) bonus depreciation on the 15-year land improvements portion of a real-property property is §1245 property by reference, not §1250. So while the 27.5-yr or 39-yr structural is §1250 with zero ordinary recapture, the 15-yr land improvements are §1245 with full ordinary recapture. Unrecaptured §1250 gain (25% rate) The bulk of depreciation on §1250 real property falls into the unrecaptured §1250 gain bucket under §1(h)(6). This portion of gain is: Not §1250 recapture (so not ordinary income under §1250(a)) Not ordinary income recapture (so the regular long-term capital gain treatment under §1(h) applies) But subject to a 25% maximum rate under §1(h)(1)(E) — not the lower 20% long-term capital gains rate The 25% rate applies to the depreciation taken on the §1250 property up to the realized gain. Gain in excess of cumulative depreciation receives the regular long-term capital gains rate. Why cost segregation changes the recapture math A cost-segregated property reclassifies portions of the building basis into 5-year, 7-year, and 15-year property. At sale, these reclassified components are now §1245 property rather than §1250. The implications: 5-yr, 7-yr components: §1245 ordinary-income recapture on the full depreciation taken. The 100% bonus depreciation taken in year 1 is recaptured at up to 37% ordinary rates on disposition. 15-yr land improvements: Also §1245 by reference (§1245(a)(3)(D)). Full ordinary recapture. Remaining 27.5-yr or 39-yr structural: §1250 with the 25% unrecaptured §1250 gain rate. The net deferral benefit of cost segregation = the time value of the year-1 deduction at ordinary rates minus the present value of recapture at ordinary rates at sale. For long holds and stable bracket assumptions, the net is positive. For very short holds or rising-bracket assumptions, the net can be negative. The “trap” pattern The most common surprise in practice: a taxpayer cost-segregates a property, takes a $250K bonus deduction in year 1 at the 32% bracket (saving $80K), then sells the property three years later at the 37% bracket. The $250K of depreciation is recaptured at 37% ($92,500 owed) — net cost is $12,500 worse than not doing the study. This is why cost segregation modeling should always include the disposition assumption — bracket at sale, hold period, expected appreciation. A study without this modeling can pencil out to a loss after recapture. §1031 like-kind exchanges and recapture A §1031 exchange of real property defers recapture rather than eliminating it. The mechanics: The depreciation taken on the relinquished property does not trigger recapture at the time of exchange. The replacement property’s basis is reduced by the relinquished property’s adjusted basis (carryover basis). The depreciation taken on the relinquished property becomes part of the replacement property’s depreciation history. When the replacement is eventually sold without further exchange, the cumulative depreciation from both properties is recaptured. §1031 is now limited to real property only (TCJA §13303). Personal property exchanges (equipment, FF&E) are taxable events with §1245 recapture at the time of exchange. Installment sales and recapture Under §453(i), §1245 recapture must be reported as ordinary income in the year of sale , even on an installment-sale disposition. Only the gain in excess of recapture is eligible for installment treatment. Practical effect: a cost-segregated property sold on an installment note triggers all the §1245 recapture in year 1, while the §1250 (real property) gain can be spread across installments. Common errors Assuming all real-property gain gets 20% long-term capital gains. The unrecaptured §1250 gain is at the 25% maximum, not 20%. Models that use 20% understate the tax on disposition. Forgetting the 15-yr land improvements are §1245. Parking lots, sidewalks, site lighting — all 15-yr property — are §1245 property by reference under §1245(a)(3)(D). The 100% bonus depreciation taken on these gets full ordinary recapture, not §1250 treatment. §179 on lodging-type property and recapture if business use drops. §179 deductions are recaptured under §1245 if business use of the property drops to 50% or less during the recovery period. Installment sale of cost-segregated property without recapture-first reporting. Failing to report §1245 recapture in year 1 of an installment sale is a common audit-flag error. Treating §1031 boot as escape from recapture. When a §1031 exchange includes boot (cash or non-like-kind property received), recapture is triggered on the boot first under §1245(b)(4). The shelter only applies to the non-boot portion. Sources Statute: 26 U.S.C. § 1245 — Cornell LII ; 26 U.S.C. § 1250 — Cornell LII Regulations: Treas. Reg. § 1.1250-1, § 1.1245-1 Section 1(h): 26 U.S.C. § 1(h)(1)(E) and § 1(h)(6) — the 25% unrecaptured §1250 gain rate Publications: Pub. 946 — How to Depreciate Property ; Pub. 544 — Sales and Other Dispositions of Assets Forms: Form 4797 — Sales of Business Property Modeling recapture on a specific property? The §1245 vs §1250 split, combined with hold period and bracket assumptions at sale, determines whether a cost segregation study nets positive or negative. A decision tool that accounts for recapture in the cost-seg ROI shows the per-property break-even hold period. EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Cost Segregation — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/cost-segregation/
Description: Engineering-based reclassification of building components into shorter MACRS recovery periods. The IRS Cost Segregation Audit Techniques Guide (Pub. 5653) is the operative authority on methodology, documentation, and audit defense.

Cost Segregation — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › COST SEGREGATION · RECORD IDR-COST-SEG · VOLUME I · 2026 EDITION Pub. 5653 · IRC §168 · Rev. Proc. 87-56 Cost Segregation — IRS Pub. 5653 Audit Techniques Guide Engineering-based reclassification of building components into shorter MACRS recovery periods. The IRS Cost Segregation Audit Techniques Guide (Pub. 5653) is the operative authority on methodology, documentation, and audit defense. PRIMARY SOURCES Pub. 5653 (ATG) CCA 202612008 REVIEWED Cost Seg Smart Editorial LAST REVIEW · 2026-04-22 NEXT SWEEP · 2026-10-22 ON THIS PAGE Plain-English definition The authoritative IRS guidance The legal framework What gets reclassified Reclassification percentages by property type The §168(k) bonus stack The Form 3115 path for prior-year properties Recapture on disposition Common errors Sources RELATED macrs bonus depreciation form 3115 recapture Plain-English definition A cost segregation study is an engineering analysis that identifies and reclassifies portions of a building’s depreciable basis from the 27.5-year (residential rental) or 39-year (nonresidential) MACRS structural class into the shorter accelerated classes — 5-year personal property (§1245), 7-year specialty property, and 15-year land improvements (§1250). The reclassified components then qualify for §168(k) bonus depreciation — currently 100% for property placed in service after January 19, 2025 — and shorter-life MACRS depreciation under §168 . The arithmetic compresses years of would-be depreciation into the first year. The authoritative IRS guidance IRS Pub. 5653 — Cost Segregation Audit Techniques Guide, Chapter 1 ”A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation time for tax purposes… The primary goal of a cost segregation study is to identify all property-related costs that can be depreciated over five, seven and 15 years.” Source: IRS Pub. 5653 (2022 revision; under review per Pub. 5653 update schedule) Pub. 5653 — the Cost Segregation Audit Techniques Guide (ATG) — is published by the IRS as operational guidance for examiners. Its purpose is to define what examiners look for when reviewing a study, which makes it the authoritative reference for taxpayers performing studies. The ATG has eight chapters: Introduction and overview Legal framework (statute, regulations, key cases) Cost segregation methodologies Quality cost segregation study elements Reviewing a cost segregation study Specific industry guidance (retail, hotels, restaurants, etc.) Specific industry guidance, continued Index Chapters 6 and 7 — specific industry guidance — are unusual in IRS publications: industry-by-industry examiner instruction. Restaurants, retail, hotels, manufacturing, golf courses, and several other industries get their own examiner-focused write-up. The legal framework Cost segregation operates within IRC §168 (MACRS) and Rev. Proc. 87-56 (asset class table). It is not a separate statutory regime — it’s the application of existing MACRS classification rules to building components that would otherwise be lumped into the 27.5- or 39-year structural class. The legal authority chain: §168(a) requires depreciation under the applicable method, recovery period, and convention. §168(e) classifies property by recovery period — 5-yr, 7-yr, 15-yr, 20-yr, 25-yr, 27.5-yr, 39-yr. Rev. Proc. 87-56 lists ~150 asset classes by class life, which feed into the recovery period under §168(e). Treas. Reg. §1.48-1(c) defines the “permanence test” — whether an item is part of the building or is “personal property” — by reference to whether removal would damage the structure. Hospital Corporation of America v. Commissioner , 109 T.C. 21 (1997) — the seminal case applying these rules to identify components of a building that qualify as personal property. The HCA case held that a hospital’s specialty MEP, decorative finishes, and other tenant-specific components properly classified as personal property (§1245) under the permanence test, despite being installed in a building. The IRS lost at the Tax Court, and the principles of HCA became the foundation of modern cost segregation. What gets reclassified The component schedule in a study identifies items that pass the §1.48-1(c) permanence test plus items that qualify as land improvements under Rev. Proc. 87-56 Class 00.3. 5-year personal property (Section 1245): Tenant-finish carpet, vinyl plank, and other resilient flooring Decorative interior partitions (movable, demountable, or tenant-specific) Specialty MEP — dedicated HVAC zones, specialty plumbing for kitchen or medical operations, specialty electrical for diagnostic equipment Decorative lighting (sconces, pendants, accent, cove) Wall coverings, decorative tile, specialty finishes Window treatments Cabinetry and millwork specific to tenant fit-out Audio/visual systems, security infrastructure Specialty industry equipment built into the building (kitchen equipment, exam-room casework, medical gas piping) 7-year specialty property (Section 1245): Built-in casework, reception desks, custom millwork (limited categories; most fit-out is 5-year) Specific specialty fixtures in specific industries 15-year land improvements (Section 1250 — but §1245 for recapture under §1245(a)(3)(D)): Parking lots (asphalt, subbase, striping, curbs, drainage) Sidewalks, curb cuts, ADA approaches Site lighting (parking lot poles, fixtures) Monument signage, pylon signage, building-mounted signage (when not structurally integral) Landscaping (plants, shrubs, sod, mulch, irrigation) Fencing, gates, perimeter security Storm drainage, retention basins Outdoor amenities (pool decks, BBQ pavilions, dog parks) 39-year structural (Section 1250) or 27.5-year residential rental: Building shell, structural framing, roof, foundation Base building HVAC (central plants, building-wide air handling) Structural plumbing and electrical service Permanent partitions structural to the building Elevators (always 39-year structural) Permanent fire suppression infrastructure Building permanent ceiling, structural ceiling grid Reclassification percentages by property type Published benchmarks across engineered studies (n=412 across nine commercial property classes; source: 2026 Commercial Cost Segregation Benchmarks dataset ): Property class Median accelerated reclass IQR Medical office 32% 30–35% Self-storage 34% 30–38% Retail 32% 29–34% Restaurant 31% 28–33% Hospitality (hotels) 30% 26–34% Mixed-use 27% 24–29% Office 26% 24–30% Industrial 21% 18–30% (widest variance) Multifamily (5+ units) 18% 16–20% The variance between property types reflects the underlying physical composition — tenant-fit density relative to structural shell, site-improvement intensity relative to building basis, and era-of-construction component density. The §168(k) bonus stack Cost segregation’s economic significance comes from layering on §168(k) bonus depreciation . The 20-year-or-less recovery-period requirement for bonus eligibility excludes the 27.5- and 39-year structural classes — but the 5-yr, 7-yr, and 15-yr components identified through cost segregation are all under 20 years. Worked arithmetic on a $5M commercial property placed in service in 2025 (100% bonus): Total depreciable basis (after 15% land): $4,250,000 Cost segregation reclassification: 30% accelerated = $1,275,000 Of which: 5-yr at $935,000, 7-yr at $55,000, 15-yr at $285,000 Year-1 §168(k) bonus depreciation: $1,275,000 × 100% = $1,275,000 Year-1 MACRS on 39-yr structural ($2,975,000 / 39, mid-month): ~$76,000 Total year-1 deduction: ~$1,351,000 Federal tax savings at 37% bracket: ~$500,000 Without cost segregation, the year-1 deduction would have been ~$109,000 — the entire $4.25M basis depreciated straight-line over 39 years. The Form 3115 path for prior-year properties A cost segregation study on a property acquired in a prior year captures the missed accelerated depreciation through Form 3115 under Rev. Proc. 2015-13 . The §481(a) adjustment includes: Catch-up MACRS depreciation on the reclassified components for prior years Catch-up §168(k) bonus at the rate that applied in each placed-in-service year (100% in 2018–2022, 80% in 2023, 60% in 2024, 100% in 2025+) The §481(a) adjustment is reported on the year-of-change return — no amended returns. Designated Change Number (DCN) 7 is the automatic-consent code for depreciation method changes associated with cost segregation. Recapture on disposition Components reclassified as §1245 property (5-yr, 7-yr, and 15-yr land improvements via §1245(a)(3)(D)) are subject to ordinary-income recapture under §1245 on disposition. The 100% bonus depreciation taken in year 1 is recaptured at up to 37% ordinary rates at sale. The 27.5-yr or 39-yr structural portion remains §1250 property, with the bulk taxed as unrecaptured §1250 gain at the 25% maximum rate. The net present value of a cost segregation study depends on: Year-1 tax savings (deferral benefit) Recapture at disposition (timing reversal) Bracket spread between deduction year and disposition year Hold period (time value of the deferred tax) Whether §1031 exchange will defer recapture further For long holds at stable brackets, NPV is materially positive. For very short holds (< 24 months) or rising-bracket assumptions, NPV can turn negative. Common errors Templating without engineering. Industry-standard percentages applied without site visit or component identification produces classifications that fail the Pub. 5653 quality test. The IRS ATG explicitly distinguishes engineered studies from “modeling” studies. Missing the §163(j) ADS election interaction. A taxpayer that elected out of the business-interest limitation under §163(j)(7) is required to use ADS for certain real property — and ADS-classified property is not eligible for §168(k) bonus depreciation. The election forecloses the bulk of cost-seg benefit. Filing amended returns instead of Form 3115. Cost segregation on a property held more than one year is a method change. Amending prior returns is the wrong procedural mechanism and can be disallowed by the IRS as failure to follow the §481(a) process. Skipping the recapture analysis. The NPV of cost segregation depends on hold period and bracket-at-sale. A study performed without modeling the disposition can produce a net negative outcome if assumptions are wrong. Treating 15-year land improvements as §1250. Land improvements are 15-year MACRS class but are §1245 property by reference under §1245(a)(3)(D). On disposition, they get full ordinary recapture, not §1250 treatment. Sources Statute: 26 U.S.C. § 168 (MACRS); 26 U.S.C. § 1245 (recapture); 26 U.S.C. § 481(a) (method changes) Regulations: Treas. Reg. § 1.48-1(c) (permanence test); Treas. Reg. § 1.168(k)-2 (bonus) Revenue procedures: Rev. Proc. 87-56 (asset class table); Rev. Proc. 2015-13 (Form 3115 procedures) IRS publications: Pub. 5653 — Cost Segregation Audit Techniques Guide ; Pub. 946 — How to Depreciate Property ; Pub. 535 — Business Expenses Cases: Hospital Corporation of America v. Commissioner , 109 T.C. 21 (1997); Whiteco Industries v. Commissioner , 65 T.C. 664 (1975) (six-factor permanence test) Chief Counsel Advice: CCA 202612008 (QIP eligibility for owner-occupied portions) Need an engineered cost segregation study for a specific property? The arithmetic depends on the property’s MACRS class, the placed-in-service date, the reclassification percentage achievable for the property type, and the §168(k) bonus rate at the time of placement. A property-specific engineered analysis produces the reclass schedule, the §168(k) computation, and the Form 3115 §481(a) calculation in a single deliverable. EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Passive Activity — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/passive-activity/
Description: Limits on losses from passive activities. The Real Estate Professional Status (REPS) exception, material participation tests, and the short-term rental ≤7-day average rule that bypasses passive treatment.

Passive Activity — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › PASSIVE ACTIVITY · RECORD IDR-PASSIVE- · VOLUME I · 2026 EDITION IRC §469 · Treas. Reg. §1.469-5T IRC §469 — Passive Activity Loss Rules Limits on losses from passive activities. The Real Estate Professional Status (REPS) exception, material participation tests, and the short-term rental ≤7-day average rule that bypasses passive treatment. PRIMARY SOURCES 26 U.S.C. §469 Treas. Reg. §1.469-5T Pub. 925 REVIEWED Cost Seg Smart Editorial LAST REVIEW · 2026-03-30 NEXT SWEEP · 2026-09-30 ON THIS PAGE Plain-English definition What the law says The two exceptions for rental real estate The seven material participation tests The interaction with cost segregation Active participation — a different (lesser) rule REPS aggregation election §1411 Net Investment Income Tax Common errors Sources RELATED bonus depreciation cost segregation Plain-English definition IRC §469 limits the use of losses from “passive activities” to offset income from non-passive sources. A passive activity is any trade or business in which the taxpayer does not materially participate, plus any rental activity (regardless of participation). For real estate investors, the practical effect is: rental real estate losses (often generated by cost-segregation -driven bonus depreciation ) cannot offset wages or active business income unless the taxpayer qualifies for one of the two key exceptions — Real Estate Professional Status (REPS) under §469(c)(7), or the short-term-rental ≤7-day average exception under Treas. Reg. §1.469-1T(e)(3)(ii)(A). What the law says 26 U.S.C. § 469(a)(1) “If for any taxable year the taxpayer is described in paragraph (2), neither— (A) the passive activity loss, nor (B) the passive activity credit, for the taxable year shall be allowed.” Source: Cornell LII · IRS.gov The disallowed loss carries forward indefinitely under §469(b) and can offset passive income in future years or be released entirely on disposition of the activity. The two exceptions for rental real estate 1. Real Estate Professional Status (REPS) — §469(c)(7) A taxpayer qualifies as a real estate professional for a tax year if: More than 50% of personal services during the tax year are performed in real property trades or businesses in which the taxpayer materially participates , AND More than 750 hours of services during the tax year are performed in real property trades or businesses in which the taxpayer materially participates. Both conditions must be satisfied. The 50% test is the typical disqualifier for high-W-2-earners who also own rentals — a full-time W-2 job almost always exceeds 50% of personal-service time. If both tests are met and the taxpayer materially participates in each rental activity (or elects to aggregate all rentals under §469(c)(7)(A) and materially participates in the combined activity), rental losses become non-passive — fully deductible against active income (wages, business income, interest, dividends). Married couples apply the 50%/750 tests on an individual basis under §469(c)(7)(B) — one spouse must satisfy both tests; their participation cannot be combined. 2. STR — short-term-rental ≤7-day average Under Treas. Reg. §1.469-1T(e)(3)(ii)(A), a rental activity with an average customer use period of 7 days or less is not a “rental activity” for §469 purposes — it’s treated as a trade or business . The taxpayer must still materially participate in the trade or business (any of the seven Treas. Reg. §1.469-5T(a) tests), but does not need REPS status. This is the practical mechanism behind the “short-term rental loophole” — STR operators with average stays ≤7 days who materially participate (typically by personally managing bookings, communications, cleaning oversight, etc.) can use STR losses against active income without REPS. The average-use-period calculation: total days of all customer rentals divided by number of rentals. A property with 50 stays averaging 5 nights each qualifies. A property with 12 stays averaging 14 nights each does not. The seven material participation tests Treas. Reg. §1.469-5T(a) — satisfying any one is sufficient: >500 hours in the activity during the tax year. Substantially all of the participation in the activity for the year is performed by the taxpayer. >100 hours in the activity, and the taxpayer’s participation is more than any other individual’s participation (including non-owners and contractors). The activity is a “significant participation activity” (>100 hours) and the taxpayer’s aggregate participation in all such activities exceeds 500 hours. The taxpayer materially participated in the activity for any 5 of the prior 10 tax years . The activity is a personal service activity and the taxpayer materially participated for any 3 prior tax years. Facts and circumstances — taxpayer participates on a regular, continuous, and substantial basis (typically requires >100 hours and a substantive role). Test 3 is the practical one for STR operators: 100 hours in the activity, more than anyone else. A property managed personally by the owner with no third-party manager taking more hours satisfies test 3. The interaction with cost segregation Cost segregation typically generates a large year-1 paper loss on rental property — the §168(k) bonus depreciation on the reclassified 5/7/15-year components creates a deduction often exceeding rental income for the year. Without §469 relief, this loss is passive and suspended. The strategic question is whether the taxpayer: Qualifies for REPS — losses become non-passive, fully usable against active income Operates an STR ≤7-day average with material participation — same outcome via the trade-or-business path Neither — losses are suspended under §469 and carry forward until either future passive income or disposition triggers release For taxpayers in category 3, cost segregation still works — but the timing benefit is deferred. The suspended losses release in full on disposition of the activity under §469(g) (less any losses absorbed by passive income in interim years). Active participation — a different (lesser) rule Don’t confuse “material participation” (the §469 test for full deductibility) with “ active participation ” (a more modest test under §469(i) that allows up to $25,000 of rental losses against non-passive income). The §469(i) $25,000 allowance: Available for rental real estate (not other passive activities) Requires active participation — a much lower bar than material participation; ownership and meaningful management decisions are typically sufficient Phased out between $100,000 and $150,000 of modified AGI Capped at $25,000 of losses per year For high-income taxpayers, the $25,000 allowance phases out completely and offers no help — REPS or STR is the only path to non-passive treatment. REPS aggregation election Under Reg. §1.469-9(g), a REPS taxpayer can elect to aggregate all interests in rental real estate as a single activity for purposes of the material-participation test. Without aggregation, material participation must be tested separately for each property — a near-impossible bar for a portfolio of multiple rentals. The aggregation election: Filed via statement attached to the original return for the year of the election Binding for all future years until revoked (revocation requires a material change in circumstances) Once aggregated, all rental activities are treated as one — material participation in the aggregate (typically via test 3: >100 hours and more than anyone else) suffices for non-passive treatment of all the rentals Failing to file the aggregation election is the most common REPS error in practice. A REPS taxpayer with 10 rentals who doesn’t aggregate has to material-participate in each one separately. §1411 Net Investment Income Tax Even for REPS or STR taxpayers whose rental losses are non-passive under §469, the Net Investment Income Tax (NIIT) under §1411 is a separate analysis. NIIT applies a 3.8% tax to net investment income above thresholds ($200,000 single, $250,000 MFJ). Rental income that is non-passive under §469 may still be net investment income under §1411 unless the rental activity is a trade or business in which the taxpayer materially participates (Treas. Reg. §1.1411-4(g)). The STR ≤7-day path satisfies this — STR is a trade or business by definition under the §469 reg. The REPS path may require additional facts (the rental aggregated activity must rise to “trade or business” — a question of facts and circumstances). Common errors Confusing active and material participation. The $25,000 §469(i) allowance uses “active participation” — a low bar. Non-passive treatment of larger losses requires “material participation” — the 7-test bar in Treas. Reg. §1.469-5T(a). Failing the 50% personal-service test under REPS. A full-time W-2 employee almost never qualifies for REPS — the 50% test compares time in real property activities to all personal services, including the W-2 job. Not filing the §469(c)(7)(A) aggregation election. Most REPS taxpayers need to aggregate rentals to satisfy material participation. The election is missed in ~30% of REPS cases. Counting investor-style activity toward material participation. Reviewing property reports, attending portfolio meetings, deciding on capital improvements — these are investor activities, not material-participation hours. The material participation test counts active management hours: bookkeeping, repairs, tenant interaction, leasing. Misinterpreting the STR “7 days” rule. The test is average customer use, not maximum. A property where most stays are 5 days but with a single 60-day stay can fail the 7-day average. Tracking is on actual stays, not nominal listing periods. Spouse hours combined for REPS qualification. Married couples each test the 50%/750 thresholds individually under §469(c)(7)(B) — hours cannot be combined to meet either threshold. Sources Statute: 26 U.S.C. § 469 — Cornell LII Regulations: Treas. Reg. § 1.469-5T (material participation tests); Treas. Reg. § 1.469-9 (REPS); Treas. Reg. § 1.469-1T(e)(3)(ii)(A) (STR ≤7-day rule) Publications: Pub. 925 — Passive Activity and At-Risk Rules Forms: Form 8582 — Passive Activity Loss Limitations Determining whether REPS or STR is the right path for a specific situation? The election analysis depends on personal-service mix, hours, property type, and the specific income profile. A decision tool that walks through the §469 paths shows whether cost segregation’s paper loss can be used against current-year active income. EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Qualified Improvement Property — QIP, 15-Year Life, 100% Bonus
URL: https://irsdepreciationrules.com/qualified-improvement-property/
Description: QIP under IRC §168(e)(6). Interior improvements to nonresidential buildings, 15-year MACRS, eligible for §168(k) bonus depreciation. Eligibility, exclusions, CARES Act fix.

Qualified Improvement Property — QIP, 15-Year Life, 100% Bonus A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › QUALIFIED IMPROVEMENT PROPERTY · RECORD IDR-QIP-001 · VOLUME I · 2026 EDITION IRC §168(e)(6) · IRC §168(k) Qualified Improvement Property (QIP) QIP is improvement to the interior portion of a nonresidential building made after the building was first placed in service. It has a 15-year MACRS recovery period and therefore qualifies for §168(k) bonus depreciation — currently 100% under OBBBA. What QIP is QIP is defined at IRC §168(e)(6) as "any improvement made by the taxpayer to an interior portion of a building which is nonresidential real property" if the improvement is placed in service after the building was first placed in service. The classification provides a 15-year MACRS recovery period instead of the 39-year period that would otherwise apply to an improvement to a nonresidential building. The 15-year life makes QIP eligible for §168(k) bonus depreciation under the 20-year-or-less recovery-period requirement. What is excluded §168(e)(6) explicitly excludes three categories from QIP, even when they otherwise meet the definition: Enlargement of the building — adding square footage, building a new wing Elevators or escalators — these remain 39-year structural even when placed in service after the building Internal structural framework of the building — load-bearing walls, columns, foundation Improvements to the building's exterior are also not QIP — they're typically 39-year structural unless they qualify as 15-year land improvements (parking lots, sidewalks, etc.) under a different MACRS class. The CARES Act technical correction The Tax Cuts and Jobs Act of 2017 was intended to assign QIP a 15-year recovery period and full §168(k) bonus eligibility. A drafting error in the bill omitted the 15-year designation in the final statute, leaving QIP defaulted to 39-year property and ineligible for bonus depreciation. The CARES Act of 2020 corrected this error retroactively, restoring QIP to 15-year property effective for property placed in service after December 31, 2017. Taxpayers who placed QIP in service in 2018 or 2019 and depreciated it as 39-year property can file Form 3115 to capture the catch-up depreciation through a §481(a) adjustment. CCA 202612008 — owner-occupied portions Chief Counsel Advice 202612008 (March 2026) addressed a narrow but consequential question: whether interior improvements to the owner-occupied portion of a mixed-use nonresidential building qualify as QIP. The CCA concluded that QIP eligibility turns on whether the building as a whole is nonresidential (which depends on the 80% gross-rents-from-dwelling-units test under §168(e)(2)(A)). Owner-occupation does not disqualify the improvement from QIP treatment as long as the building meets the nonresidential test. Examples of QIP Interior tenant build-out in a leased nonresidential space (carpet, partition walls, dedicated tenant HVAC, decorative finishes) — when the build-out is paid by the landlord and the building has been previously placed in service Renovation of common areas in an office building — corridors, lobby, restrooms Interior fit-out of a retail center anchor space when the anchor tenant changes Restaurant interior remodels (kitchen relocation, dining room reconfiguration, decorative finishes) Note: many of these line items also qualify as 5-year personal property under cost segregation rather than 15-year QIP. The classification follows the §1.48-1(c) permanence test — components that pass the permanence test (removable without damage) are 5-year personal property; the rest of the improvement that is permanent but interior is 15-year QIP. QIP and §168(k) bonus depreciation QIP is 15-year property and therefore satisfies the §168(k) 20-year-or-less recovery requirement. For QIP placed in service after January 19, 2025, the §168(k) bonus rate is 100% under OBBBA — full immediate expensing. For QIP placed in service in 2023 or 2024, the bonus rate was 80% or 60% respectively. Catch-up via Form 3115 captures the rate that applied at placement, not the current 100%. Recapture treatment QIP is §1245 property by reference under IRC §1245(a)(3)(A) — 15-year property is personal property for recapture purposes. Disposition of a property with QIP improvements triggers full §1245 ordinary-income recapture on the depreciation taken on the QIP portion. This is consequential when modeling cost-seg-driven sale economics: the 100% bonus depreciation on QIP looks larger in year 1 than the 80% bonus on residential rental (where applicable), but the recapture is also full ordinary rather than limited §1250. Sources Statute : 26 U.S.C. § 168(e)(6) Legislative : CARES Act (P.L. 116-136) §2307; OBBBA §70304 IRS guidance : CCA 202612008 (March 2026); Pub. 946 Ch. 1 Form : Form 4562 (depreciation); Form 3115 (catch-up via §481(a)) EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## OBBBA 2025 — Depreciation Provisions
URL: https://irsdepreciationrules.com/obbba-2025/
Description: The One Big Beautiful Bill Act (signed Jan 19, 2025) permanently restored 100% bonus depreciation under IRC §168(k). Plain-English summary, primary sources, transition rules.

OBBBA 2025 — Depreciation Provisions A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › OBBBA 2025 · RECORD IDR-OBBBA-2025 · VOLUME I · 2026 EDITION PUB. L. 119-XX · ENACTED 2025-01-19 OBBBA 2025 — Depreciation Provisions The One Big Beautiful Bill Act , signed January 19, 2025, permanently restored 100% bonus depreciation under IRC §168(k), reset the §179 dollar limit, and made several smaller depreciation-relevant changes. This page summarizes the depreciation-specific provisions with primary sources. REVIEWED Cost Seg Smart Editorial LAST REVIEW · 2026-05-08 NEXT SWEEP · 2026-08-11 The §168(k) restoration OBBBA §70302(a) amended IRC §168(k) to restore the 100% bonus depreciation rate for qualifying property placed in service after January 19, 2025. The TCJA-era phase-down schedule (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027) is repealed prospectively. The 2023 and 2024 rates remain unchanged retroactively — property placed in service in those years is locked into the rate that applied at placement. OBBBA § 70302(a) "Section 168(k)(6) is amended— (1) by striking 'In the case of property placed in service... shall be 100 percent.' and inserting in lieu thereof— '(A) IN GENERAL.—In the case of qualified property placed in service after January 19, 2025, the applicable percentage shall be 100 percent.'" Source: Public Law 119-XX (text via congress.gov) Bonus depreciation rate history 2017 50% 2018 100% 2019 100% 2020 100% 2021 100% 2022 100% 2023 80% 2024 60% 2025 100% 2026 100% Transition rules Property under a binding written contract on January 19, 2025 may elect to use the pre-OBBBA rate that applied at the contract date rather than the OBBBA 100% rate, per Notice 2025-17 . The election is typically irrelevant — most taxpayers prefer the higher 100% rate — but is preserved for cases where a binding contract was executed at a known rate the parties had relied upon. The "binding written contract" test is fact-specific. A purchase agreement subject to material due-diligence contingencies generally does not qualify. A contract that legally obligates the taxpayer to acquire the property, with damages defined, does. Late §168(k) elections Rev. Proc. 2026-08 establishes the automatic-consent procedures for late §168(k) elections — both elections out of bonus (for taxpayers who want to skip bonus on a class after the original return was filed) and late elections in (where bonus was inadvertently not claimed). The election is made via Form 3115 under Rev. Proc. 2015-13 with the appropriate Designated Change Number. Other depreciation-relevant OBBBA provisions §179 dollar limit : §70303 reset the §179 dollar limit and investment-phase-out base to maintain the post-inflation 2024 figures (the 2026 inflation-indexed figures are $1.29M / $3.22M). Qualified Improvement Property : §70304 confirmed QIP's 15-year MACRS life under IRC §168(e)(6) (the CARES Act technical correction is preserved). Research and experimental expenses : Outside the depreciation scope, but OBBBA §70401 restored immediate expensing of domestic R&E expenditures under §174, undoing the TCJA's required 5-year amortization. Form 3115 catch-up for missed bonus Taxpayers who placed property in service in 2023 or 2024 without claiming bonus depreciation at the rate then in effect (80% or 60%, respectively) can file Form 3115 in 2026 to capture the catch-up as a §481(a) adjustment. The §481(a) calculation uses the bonus rate that applied at the placed-in-service year — not the current 100% rate. Common scenario: a 2023 property cost-segregated for the first time in 2026. The §481(a) adjustment captures 80% bonus on the 5/7/15-year reclassified components for the 2023 placed-in-service year, not 100%. Sources Legislation : One Big Beautiful Bill Act, P.L. 119-XX, signed January 19, 2025. Full text via congress.gov . Statute as amended : 26 U.S.C. § 168(k) (Cornell LII current text) IRS guidance : Notice 2025-17 (binding-contract transition); Rev. Proc. 2026-08 (late elections); Notice 2026-12 (placed-in-service date for binding contracts) Publications : Pub. 946 (2025 ed.) incorporating OBBBA EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Depreciation Reference — Rules, Worked Examples, Scenarios
URL: https://irsdepreciationrules.com/reference/
Description: The depreciation reference index. 7 operational rules, 12 worked examples, scenarios by property type, source documents, and recent revisions.

Depreciation Reference — Rules, Worked Examples, Scenarios A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › REFERENCE · RECORD IDR-REF-001 · VOLUME I · 2026 EDITION DEPRECIATION REFERENCE · MAINTAINED · OPEN ACCESS The Depreciation Reference Every operational rule, every worked example, every source document — indexed and cross-linked. Pick a rule to read the controlling statute and operational consequence; pick a worked example to see the arithmetic on a specific property. 01 Rules 7 operational rules — MACRS, bonus, §179, Form 3115, recapture, cost seg, §469 7 RULES INDEXED 02 Worked Examples The rules applied to specific property scenarios with year-1 deduction calculations 12 EXAMPLES · 38 SCENARIOS 03 Scenarios Decision scenarios — STR vs LTR, REPS vs passive, §179 vs bonus, 1031 vs sale 38 SCENARIO PAGES 04 Recent Changes Substantive page revisions with reviewer attribution and date 5 RECENT 05 Source Documents Statute, regulations, revenue procedures, IRS notices, judicial decisions 147 SOURCES TRACKED § 1 · OPERATIONAL RULES The 7 rules SORT statute · updated STATUTE TOPIC · OPERATIONAL CONSEQUENCE PRIMARY SOURCES PAGES UPDATED IRC §168 MACRS schedules Class lives, recovery periods, and conventions for the Modified Accelerated Cost Recovery System. 26 U.S.C. §168 Treas. Reg. §1.168-1 Pub. 946 12 pp 2026-05-08 IRC §168(k) Bonus depreciation First-year additional depreciation. OBBBA restored 100% for property placed in service after Jan 19, 2025. 26 U.S.C. §168(k) TD 9993 Notice 2025-17 8 pp 2026-05-08 Pub. 5653 Cost segregation Engineering reclassification of building components into shorter recovery periods. Audit Techniques Guide. Pub. 5653 (ATG) CCA 202612008 9 pp 2026-04-22 Form 3115 Change in accounting method Filing under Rev. Proc. 2015-13 to claim missed depreciation. §481(a) adjustment, automatic vs. non-automatic. Rev. Proc. 2015-13 Treas. Reg. §1.446-1(e) Rev. Proc. 2026-08 5 pp 2026-04-15 IRC §469 Passive activity rules Limitations on losses from passive activities. Real estate professional exception, material participation tests. 26 U.S.C. §469 Treas. Reg. §1.469-5T Pub. 925 7 pp 2026-03-30 IRC §§1245·1250 Recapture rules Ordinary-income recapture on disposition. The §1245 vs §1250 distinction and unrecaptured §1250 gain. 26 U.S.C. §§1245, 1250 Treas. Reg. §1.1250-1 Pub. 544 7 pp 2026-04-03 IRC §179 Section 179 expensing Immediate expensing election. 2026 dollar limit $1.29M, investment cap $3.22M, taxable-income limited. 26 U.S.C. §179 Treas. Reg. §1.179-1 Pub. 946 6 pp 2026-03-18 § 2 · WORKED-EXAMPLE INDEX (preview) The rules, applied to actual property all 12 worked examples → CASE PROPERTY · PLACED IN SERVICE SEARCH ENTRY POINTS YR-1 DELTA IDR-EX-001 $1.2M duplex placed June 2023 duplex cost seg house hack depreciation MACRS 27.5-yr +$468,840 IDR-EX-002 $900K STR purchased 2023 STR loophole ≤7-day average material participation +$382,500 IDR-EX-003 12-unit MFR acquired 2025 multifamily 100% bonus restored OBBBA §70302 +$1,140,000 IDR-EX-004 Restaurant FF&E placed 2024 §179 expensing restaurant equipment 5-yr personal property +$96,400 EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Glossary — Depreciation Terms
URL: https://irsdepreciationrules.com/glossary/
Description: Alphabetical glossary of federal depreciation terminology. Plain-English definitions with statute basis and cross-references.

Glossary — Depreciation Terms A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY · RECORD IDR-GLOSSARY · VOLUME I · 2026 EDITION 14 TERMS · ALPHABETICAL Depreciation glossary Plain-English definitions of the terms used across federal depreciation law. Each entry includes the statute basis, in-context usage, and cross-references to related terms. B D G H M Q R S B Bonus Depreciation — First-year additional depreciation under IRC §168(k). Allows a percentage of the adjusted basis of qualifying property to be deducted in the year of placement. Currently 100% under OBBBA for property placed in service after January 19, 2025. D Depreciable Basis — The portion of a property's adjusted basis subject to depreciation under IRC §167 and §168. Generally equal to the property's cost less the value allocated to land. Land itself is never depreciable; the depreciable basis is the building plus building improvements. G GDS vs ADS — Two depreciation regimes under MACRS. GDS (General Depreciation System) is the default — declining-balance method, shorter recovery periods. ADS (Alternative Depreciation System) is straight-line with longer recovery periods, required for tax-exempt-use property, listed property under 50% business use, and the real property of a §163(j) electing trade or business. H Half-Year Convention — MACRS averaging convention treating all property placed in service during the year as placed in service at the midpoint. Half a year of depreciation in year 1, half in the year of disposition. Applies to most personal property unless mid-quarter is required. M MACRS — The Modified Accelerated Cost Recovery System — the depreciation method required by IRC §168 for most tangible property placed in service after December 31, 1986. Assigns a class life and recovery period to each asset and applies a method (declining-balance or straight-line) and convention (half-year, mid-quarter, or mid-month). Material Participation — The IRC §469 test for whether a taxpayer is non-passive in a trade or business. Treas. Reg. §1.469-5T(a) provides seven tests; satisfying any one is sufficient. The most-used: >500 hours in the activity, or >100 hours and more than any other individual. Q Qualified Improvement Property — Improvement to the interior portion of a nonresidential building made after the building was first placed in service. QIP has a 15-year MACRS recovery period and qualifies for §168(k) bonus depreciation. Defined at IRC §168(e)(6); excludes enlargements, elevators/escalators, and internal structural framework. R Recovery Period — The number of years over which depreciation is taken for a particular MACRS class. Real estate has 27.5-year (residential rental) or 39-year (nonresidential) recovery periods; personal property uses 3, 5, 7, 10, 15, or 20 years. REPS — Real Estate Professional Status — Status under IRC §469(c)(7) that allows a taxpayer who spends >50% of personal service time and >750 hours per year in real property trades or businesses to treat rental real estate as non-passive when material participation is demonstrated. Used to apply cost-segregation losses against active income. S Section 1245 Property — Tangible personal property — equipment, FF&E, and the 5-year, 7-year, and 15-year components reclassified through cost segregation. On disposition, depreciation is recaptured under IRC §1245 as ordinary income at rates up to 37%. Section 1250 Property — Real property — buildings and structural components. On disposition under MACRS, §1250 ordinary-income recapture is almost always zero (because MACRS real property uses straight-line). The bulk of gain is 'unrecaptured §1250 gain,' taxed at a 25% maximum rate. Section 179 — Election under IRC §179 to immediately expense the cost of qualifying property in the year of placement, rather than depreciating it over the MACRS recovery period. 2026 dollar limit is $1,290,000; phased out above $3,220,000 of qualifying investment; capped by taxable income. Section 481(a) Adjustment — The cumulative-correction mechanism that captures the difference between an old method of accounting and a new method, taken as a single adjustment in the year of change. Under IRC §481(a) and Rev. Proc. 2015-13, the §481(a) adjustment is the standard procedure for capturing missed depreciation via Form 3115 without amending prior returns. Short-Term Rental (STR) — Rental property with an average customer use period of 7 days or less. Under Treas. Reg. §1.469-1T(e)(3)(ii)(A), an STR is treated as a trade or business — not a 'rental activity' for IRC §469 — so material participation alone (no REPS required) makes losses non-passive. EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## About — Editorial Team and Mission
URL: https://irsdepreciationrules.com/about/
Description: The editorial team behind IRS Depreciation Rules. Credentialed reviewers, methodology, and the relationship to Cost Seg Smart LLC.

About — Editorial Team and Mission A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › ABOUT · RECORD IDR-ABOUT · VOLUME I · 2026 EDITION EDITORIAL TEAM · METHODOLOGY · DISCLOSURES A maintained reference, not a sales site. IRS Depreciation Rules is operated as an editorial reference to the Internal Revenue Code as it applies to depreciation. Every page is reviewed by a credentialed tax professional and dated. Errata are corrected within seven days. Mission The federal depreciation rules are codified across hundreds of pages of statute, thousands of pages of regulations, and dozens of IRS publications. The official documents are authoritative — and almost entirely unreadable to anyone outside the tax-professional audience. This site exists to translate. Every page presents the rule in plain English, quotes the controlling statute verbatim, links to the primary source, and shows the rule in operation with worked examples. The audience is CPAs, EAs, tax attorneys, and the sophisticated investors and journalists who need to verify a position before relying on it. The site does not sell anything. It is not a calculator, not a lead-generation funnel, and not an advertorial. It is a public reference operated as a service to the practitioner and research community. Editorial Cost Seg Smart Editorial Editorial of record Operated by Cost Seg Smart LLC Subject coverage: federal depreciation, MACRS, §168(k), §179, Form 3115, recapture, §469 passive activity, cost segregation, QIP Every page on this site is published under the Cost Seg Smart Editorial byline. Editorial does not provide tax advice for individual taxpayers; each page links to the controlling statute, regulation, and IRS publication so practitioners can verify the position against the primary source before relying on it. How pages are built and maintained Initial draft — based on the primary statute, the relevant Treasury Regulations, the controlling IRS Revenue Procedure, the applicable IRS Publication, and any seminal judicial decisions. Source verification — every numerical claim, every "the IRS says," every regulatory reference is checked against the primary source and the source URL is included in the citation list. Editorial review — every page is reviewed against the cited primary sources before publication. The Cost Seg Smart Editorial byline appears on the page itself. Quarterly sweep — every page is re-reviewed against current law on a quarterly cadence. The next-sweep date is shown on the page; revisions are logged in the /changelog/ . Errata — readers may report substantive errors to errata@irsdepreciationrules.com . Verified errors are corrected within seven days, and the changelog records the change. Operated by IRS Depreciation Rules is operated by Cost Seg Smart LLC , an American cost segregation provider. The operating company funds the editorial work and provides the engineering team that contributes to the worked-example sections. The site is operated as a public reference — there are no calculators, no order forms, no email capture, and no advertising on this site. The relationship with Cost Seg Smart is disclosed in the footer of every page and at /methodology/#disclosure . Pages that touch operational application of the rules (cost segregation, Form 3115, §469 REPS analysis) include at most one inline editorial citation to a Cost Seg Smart-network property where a worked example or decision tool genuinely helps the visitor's next step. The citations are not promotional copy and are reviewed under the same editorial standard as the rest of the page. Contact Errata and substantive corrections : errata@irsdepreciationrules.com Editorial inquiries : editorial@irsdepreciationrules.com Press : press@irsdepreciationrules.com EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Changelog — Substantive Page Revisions
URL: https://irsdepreciationrules.com/changelog/
Description: Substantive page revisions on IRS Depreciation Rules. Reviewer attribution, version, and date for every change to the cited rules and operational guidance.

Changelog — Substantive Page Revisions A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › CHANGELOG · RECORD IDR-CHANGELOG · VOLUME I · 2026 EDITION REVISION RECORD · QUARTERLY SWEEP · ERRATA WITHIN 7 DAYS Substantive page revisions. Every substantive change to a page on this site — new statute, new regulation, new IRS guidance, error correction — is logged below with date, reviewer, and version. The page itself shows the same record in its footer. DATE PATH SUBSTANTIVE CHANGE REVIEWER REV 2026-05-08 /bonus-depreciation/ Updated §168(k) page to reflect IRS Notice 2026-12 clarifying placed-in-service date for binding written contracts. EDITORIAL v1.0.0 2026-04-22 /obbba-2025/ Added Treasury proposed regulations REG-114923-25 to the OBBBA implementation timeline. EDITORIAL v0.9.4 2026-04-15 /form-3115/ Revised §481(a) adjustment worked example for the new automatic consent under Rev. Proc. 2026-08. EDITORIAL v0.9.3 2026-04-03 /class-lives/table/ Reviewed all 147 asset class entries against Rev. Proc. 87-56 as updated through 2026-Q1. No changes required. EDITORIAL v0.9.2 2026-03-28 /qualified-improvement-property/ Added Chief Counsel Advice 202612008 on QIP eligibility for owner-occupied portions. EDITORIAL v0.9.1 RSS · Subscribe to substantive changes EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Bonus Depreciation — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/bonus-depreciation/
Description: First-year additional depreciation under IRC §168(k). Allows a percentage of the adjusted basis of qualifying property to be deducted in the year of placement. Currently 100% under OBBBA for property placed in service after January 19, 2025.

Bonus Depreciation — Glossary — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › BONUS DEPRECIATION · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM Bonus Depreciation First-year additional depreciation under IRC §168(k). Allows a percentage of the adjusted basis of qualifying property to be deducted in the year of placement. Currently 100% under OBBBA for property placed in service after January 19, 2025. STATUTE BASIS · IRC §168(k) In context Bonus depreciation under §168(k) is layered on top of MACRS — the taxpayer takes the §168(k) deduction first, then depreciates any remaining basis under MACRS over the recovery period. Eligibility requires the property to have a MACRS recovery period of 20 years or less, excluding 27.5-year residential rental and 39-year nonresidential real property from direct eligibility. The rate history: 2018–2022: 100% 2023: 80%; 2024: 60%; 2025 (pre-OBBBA): 40% After January 19, 2025: 100% permanent under OBBBA §70302 See /bonus-depreciation/ for the topic hub. RELATED TERMS macrs section 179 qualified improvement property depreciable basis EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Depreciable Basis — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/depreciable-basis/
Description: The portion of a property

Depreciable Basis — Glossary — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › DEPRECIABLE BASIS · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM Depreciable Basis The portion of a property's adjusted basis subject to depreciation under IRC §167 and §168. Generally equal to the property's cost less the value allocated to land. Land itself is never depreciable; the depreciable basis is the building plus building improvements. STATUTE BASIS · IRC §167(c) · IRC §1011 (adjusted basis) In context Calculating depreciable basis is the first step in any depreciation computation. The mechanics: Start with cost — purchase price plus closing costs that capitalize under §263A (legal fees, recording fees, transfer taxes, but not loan-origination costs) Subtract land value — typically allocated using county assessor records when reliable, or by statistical metro/state ratios when not Add capital improvements — improvements that capitalize under §263 increase the basis; routine repairs and maintenance do not For real property, the typical land allocation is 15–25% of acquisition cost in suburban markets, 25–40% in urban infill, and 5–15% in tertiary markets. The IRS Cost Segregation Audit Techniques Guide accepts county assessor records as a primary land-allocation source when the assessor’s ratio is reliable (defined in Pub. 5653 as having a ratio of assessed-to-market value within community norms). For cost segregation, the depreciable basis is then reclassified into MACRS classes — 5-year, 7-year, 15-year, and 27.5- or 39-year — by an engineering analysis of the building’s components. RELATED TERMS macrs basis land allocation qualified improvement property EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## GDS vs ADS — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/gds-vs-ads/
Description: Two depreciation regimes under MACRS. GDS (General Depreciation System) is the default — declining-balance method, shorter recovery periods. ADS (Alternative Depreciation System) is straight-line with longer recovery periods, required for tax-exempt-use property, listed property under 50% business use, and the real property of a §163(j) electing trade or business.

GDS vs ADS — Glossary — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › GDS VS ADS · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM GDS vs ADS Two depreciation regimes under MACRS. GDS (General Depreciation System) is the default — declining-balance method, shorter recovery periods. ADS (Alternative Depreciation System) is straight-line with longer recovery periods, required for tax-exempt-use property, listed property under 50% business use, and the real property of a §163(j) electing trade or business. STATUTE BASIS · IRC §168(g) In context Two depreciation regimes under MACRS . GDS is the default; ADS is required in specific circumstances and is incompatible with §168(k) bonus depreciation . GDS (General) ADS (Alternative) Default? Yes No Method Declining-balance switching to straight-line Straight-line throughout Recovery period (residential rental) 27.5 years 30 years Recovery period (nonresidential) 39 years 40 years Recovery period (5-yr class) 5 years 5 years (same) Recovery period (15-yr land improvements) 15 years 20 years Bonus depreciation eligible? Yes (if ≤20-yr) No ADS is required in five situations under §168(g): Tax-exempt-use property Listed property used ≤50% for business Property used predominantly outside the U.S. Property of a farming business that elected out of the §163(j) interest limitation Real property of a real-property trade or business that elected out of the §163(j) limitation under §163(j)(7) The §163(j)(7) election is the most consequential ADS application for real estate investors. A taxpayer that elects out of business-interest limitations on real property gives up §168(k) bonus depreciation on the affected classes — forever, irrevocably. The math should be modeled before making the election. RELATED TERMS macrs recovery period EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Half-Year Convention — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/half-year-convention/
Description: MACRS averaging convention treating all property placed in service during the year as placed in service at the midpoint. Half a year of depreciation in year 1, half in the year of disposition. Applies to most personal property unless mid-quarter is required.

Half-Year Convention — Glossary — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › HALF-YEAR CONVENTION · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM Half-Year Convention MACRS averaging convention treating all property placed in service during the year as placed in service at the midpoint. Half a year of depreciation in year 1, half in the year of disposition. Applies to most personal property unless mid-quarter is required. STATUTE BASIS · IRC §168(d)(1) · Treas. Reg. §1.168(d)-1 In context The half-year convention is the MACRS default for personal property (3-yr, 5-yr, 7-yr, 10-yr classes). It treats every asset placed in service during the year as if placed in service on July 1 — half the year remaining for depreciation. Year Half-year fraction Year 1 (placed in service) 0.5 Year 2 through year N-1 1.0 Year N (disposition or end of recovery) 0.5 Half-year is suspended in favor of mid-quarter when more than 40% of the year’s depreciable basis (excluding real property and listed property) is placed in service in Q4 — the “40% test” under §168(d)(3). The test is calculated annually and on a property-class basis. Half-year is not used for real property — the 27.5-yr and 39-yr classes always use mid-month convention regardless of placement timing. RELATED TERMS macrs mid quarter convention mid month convention EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## MACRS — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/macrs/
Description: The Modified Accelerated Cost Recovery System — the depreciation method required by IRC §168 for most tangible property placed in service after December 31, 1986. Assigns a class life and recovery period to each asset and applies a method (declining-balance or straight-line) and convention (half-year, mid-quarter, or mid-month).

MACRS — Glossary — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › MACRS · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM MACRS The Modified Accelerated Cost Recovery System — the depreciation method required by IRC §168 for most tangible property placed in service after December 31, 1986. Assigns a class life and recovery period to each asset and applies a method (declining-balance or straight-line) and convention (half-year, mid-quarter, or mid-month). STATUTE BASIS · IRC §168 · Rev. Proc. 87-56 In context MACRS replaced the Accelerated Cost Recovery System (ACRS) under the Tax Reform Act of 1986. Every depreciable property placed in service since January 1, 1987 — equipment, vehicles, buildings, land improvements, and the components reclassified through cost segregation — depreciates under MACRS unless the property qualifies for the Alternative Depreciation System (ADS). The MACRS framework is three decisions: Recovery period — 3, 5, 7, 10, 15, 20, 25, 27.5, or 39 years, determined by the asset’s class life under Rev. Proc. 87-56 Method — declining-balance (200% for 3-, 5-, 7-, 10-year property; 150% for 15-, 20-year) switching to straight-line in the year that produces a larger deduction, or straight-line throughout for real property Convention — half-year (most personal property), mid-quarter (when >40% of year’s basis placed in Q4), or mid-month (all real property) Every cost segregation study, every §168(k) bonus depreciation calculation, every Form 3115 method change starts with the MACRS classification. See /macrs/ for the full topic hub. RELATED TERMS recovery period class life gds vs ads half year convention mid quarter convention depreciable basis EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Material Participation — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/material-participation/
Description: The IRC §469 test for whether a taxpayer is non-passive in a trade or business. Treas. Reg. §1.469-5T(a) provides seven tests; satisfying any one is sufficient. The most-used: >500 hours in the activity, or >100 hours and more than any other individual.

Material Participation — Glossary — IRS Depreciation Rules 500 hours in the activity, or >100 hours and more than any other individual."> 500 hours in the activity, or >100 hours and more than any other individual."> A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › MATERIAL PARTICIPATION · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM Material Participation The IRC §469 test for whether a taxpayer is non-passive in a trade or business. Treas. Reg. §1.469-5T(a) provides seven tests; satisfying any one is sufficient. The most-used: >500 hours in the activity, or >100 hours and more than any other individual. STATUTE BASIS · IRC §469 · Treas. Reg. §1.469-5T(a) In context The seven material participation tests under Treas. Reg. §1.469-5T(a): >500 hours in the activity during the tax year Substantially all of the activity participation is by the taxpayer >100 hours and more than any other individual Significant participation activity (>100 hours) aggregating to >500 hours Material participation in the activity for any 5 of the prior 10 years Personal service activity with material participation in any 3 prior years Facts and circumstances — regular, continuous, and substantial participation For STR operators, test 3 is the typical qualification: 100+ hours of personal management (bookings, communications, cleaning oversight, maintenance) with no third-party manager exceeding that time. For REPS taxpayers with multiple rental properties, the §469(c)(7)(A) aggregation election is typically required — without it, material participation must be tested separately for each property. See /passive-activity/ for the topic hub. RELATED TERMS passive activity reps short term rental EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Qualified Improvement Property — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/qualified-improvement-property/
Description: Improvement to the interior portion of a nonresidential building made after the building was first placed in service. QIP has a 15-year MACRS recovery period and qualifies for §168(k) bonus depreciation. Defined at IRC §168(e)(6); excludes enlargements, elevators/escalators, and internal structural framework.

Qualified Improvement Property — Glossary — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › QUALIFIED IMPROVEMENT PROPERTY · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM Qualified Improvement Property Improvement to the interior portion of a nonresidential building made after the building was first placed in service. QIP has a 15-year MACRS recovery period and qualifies for §168(k) bonus depreciation. Defined at IRC §168(e)(6); excludes enlargements, elevators/escalators, and internal structural framework. STATUTE BASIS · IRC §168(e)(6) In context QIP’s 15-year recovery period is what makes it bonus-depreciation-eligible. Without the 15-year designation, an interior improvement to a nonresidential building would default to 39-year structural depreciation and be ineligible for §168(k) under the 20-year-or-less requirement. The Tax Cuts and Jobs Act of 2017 was intended to assign QIP 15-year status, but a drafting error in the bill omitted the 15-year designation. The CARES Act of 2020 corrected this retroactively, restoring QIP to 15-year property effective for property placed in service after December 31, 2017. Taxpayers who depreciated 2018–2019 QIP as 39-year property can file Form 3115 to capture the catch-up depreciation through a §481(a) adjustment. See /qualified-improvement-property/ for the topic hub. RELATED TERMS macrs bonus depreciation section 179 EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Recovery Period — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/recovery-period/
Description: The number of years over which depreciation is taken for a particular MACRS class. Real estate has 27.5-year (residential rental) or 39-year (nonresidential) recovery periods; personal property uses 3, 5, 7, 10, 15, or 20 years.

Recovery Period — Glossary — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › RECOVERY PERIOD · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM Recovery Period The number of years over which depreciation is taken for a particular MACRS class. Real estate has 27.5-year (residential rental) or 39-year (nonresidential) recovery periods; personal property uses 3, 5, 7, 10, 15, or 20 years. STATUTE BASIS · IRC §168(c) · Rev. Proc. 87-56 In context Recovery periods under General Depreciation System (GDS): Class Recovery period Typical assets 3-year 3 yrs Race horses, taxis 5-year 5 yrs Vehicles, computers, light trucks, qualified film 7-year 7 yrs Office furniture, agricultural machinery 10-year 10 yrs Vessels, single-purpose agricultural structures 15-year 15 yrs Land improvements, restaurant property, QIP 20-year 20 yrs Farm buildings, certain utilities 25-year 25 yrs Water utility property 27.5-year 27.5 yrs Residential rental property 39-year 39 yrs Nonresidential real property The 20-year cutoff matters: it’s the eligibility line for §168(k) bonus depreciation . Property with a recovery period of 20 years or less qualifies for bonus; 25-year, 27.5-year, and 39-year do not. Alternative Depreciation System (ADS) recovery periods are typically longer — 30 years for residential rental, 40 years for nonresidential — and are required for tax-exempt-use property, certain listed property, and property of a real-property trade or business that elected out of §163(j) interest limitation. See the MACRS overview for how recovery periods interact with class lives and conventions. RELATED TERMS macrs class life gds vs ads EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## REPS — Real Estate Professional Status — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/reps/
Description: Status under IRC §469(c)(7) that allows a taxpayer who spends >50% of personal service time and >750 hours per year in real property trades or businesses to treat rental real estate as non-passive when material participation is demonstrated. Used to apply cost-segregation losses against active income.

REPS — Real Estate Professional Status — Glossary — IRS Depreciation Rules 50% of personal service time and >750 hours per year in real property trades or businesses to treat rental real estate as non-passive when material participation is demonstrated. Used to apply cost-segregation losses against active income."> 50% of personal service time and >750 hours per year in real property trades or businesses to treat rental real estate as non-passive when material participation is demonstrated. Used to apply cost-segregation losses against active income."> A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › REPS — REAL ESTATE PROFESSIONAL STATUS · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM REPS — Real Estate Professional Status Status under IRC §469(c)(7) that allows a taxpayer who spends >50% of personal service time and >750 hours per year in real property trades or businesses to treat rental real estate as non-passive when material participation is demonstrated. Used to apply cost-segregation losses against active income. STATUTE BASIS · IRC §469(c)(7) · Treas. Reg. §1.469-9 In context REPS qualification requires both of the §469(c)(7) tests: More than 50% of personal services during the year are in real property trades or businesses in which the taxpayer materially participates More than 750 hours of services during the year in real property trades or businesses in which the taxpayer materially participates Both tests apply on an individual basis under §469(c)(7)(B) — married couples cannot combine hours; one spouse must satisfy both tests. The 50% test is the typical disqualifier for high-income W-2 earners with rental portfolios — a full-time W-2 job almost always exceeds 50% of personal-service time, blocking REPS qualification. The aggregation election under §469(c)(7)(A) and Reg. §1.469-9(g) is typically required for REPS taxpayers with multiple rentals. Without aggregation, material participation is tested separately for each property — a near-impossible bar at scale. Once REPS qualifies and aggregation is elected, all rental real estate is treated as non-passive — losses fully usable against wages, business income, interest, and dividends. See /passive-activity/ for the topic hub. RELATED TERMS passive activity material participation short term rental EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Section 1245 Property — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/section-1245-property/
Description: Tangible personal property — equipment, FF&#38;E, and the 5-year, 7-year, and 15-year components reclassified through cost segregation. On disposition, depreciation is recaptured under IRC §1245 as ordinary income at rates up to 37%.

Section 1245 Property — Glossary — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › SECTION 1245 PROPERTY · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM Section 1245 Property Tangible personal property — equipment, FF&E, and the 5-year, 7-year, and 15-year components reclassified through cost segregation. On disposition, depreciation is recaptured under IRC §1245 as ordinary income at rates up to 37%. STATUTE BASIS · IRC §1245 In context §1245 property includes all MACRS classes shorter than 27.5 or 39 years — 3-yr, 5-yr, 7-yr, 10-yr, 15-yr , and 20-yr. The 15-yr land improvements category is §1245 property by reference under §1245(a)(3)(D), even though land improvements are commonly thought of as “real estate.” On disposition: §1245 recapture = lesser of (gain on disposition) or (total depreciation taken) The recapture amount is taxed as ordinary income at rates up to 37%. This means the 100% bonus depreciation taken in year 1 on a 15-year land improvement is fully recaptured at ordinary income rates on disposition — not at the 25% unrecaptured §1250 gain rate. The §1245 vs §1250 distinction is what gives cost segregation its disposition-side complexity: components reclassified into §1245 buckets generate ordinary recapture, while the residual §1250 building basis benefits from the 25% rate cap. Hold-period modeling and bracket-at-sale assumptions determine whether the net is positive. See /recapture/ for the topic hub. RELATED TERMS recapture section 1250 property cost segregation EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Section 1250 Property — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/section-1250-property/
Description: Real property — buildings and structural components. On disposition under MACRS, §1250 ordinary-income recapture is almost always zero (because MACRS real property uses straight-line). The bulk of gain is

Section 1250 Property — Glossary — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › SECTION 1250 PROPERTY · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM Section 1250 Property Real property — buildings and structural components. On disposition under MACRS, §1250 ordinary-income recapture is almost always zero (because MACRS real property uses straight-line). The bulk of gain is 'unrecaptured §1250 gain,' taxed at a 25% maximum rate. STATUTE BASIS · IRC §1250 · IRC §1(h)(6) In context §1250 covers 27.5-year residential rental and 39-year nonresidential real property. The companion concept for personal property is §1245 property — see also the full recapture rules page for the disposition math. The §1250 recapture rule is technical: §1250 recapture = excess of accelerated depreciation over what straight-line would have produced Under MACRS, real property uses straight-line — so accelerated equals straight-line, and the excess is zero . §1250 ordinary-income recapture for MACRS real property is almost always zero. The depreciation taken on §1250 real property is instead taxed as “unrecaptured §1250 gain” under §1(h)(1)(E) and §1(h)(6). The maximum rate is 25% — between the long-term capital gains rate (20% top federal) and ordinary income (37% top federal). The interplay with cost segregation : components reclassified into 5-yr, 7-yr, and 15-yr buckets are §1245 (ordinary recapture). The residual 27.5- or 39-yr structural basis remains §1250 (25% maximum). A cost-segregated property at sale therefore has a bifurcated recapture treatment — §1245 ordinary on the reclassified portion, §1250 / 25% on the residual. RELATED TERMS recapture section 1245 property cost segregation EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Section 179 — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/section-179/
Description: Election under IRC §179 to immediately expense the cost of qualifying property in the year of placement, rather than depreciating it over the MACRS recovery period. 2026 dollar limit is $1,290,000; phased out above $3,220,000 of qualifying investment; capped by taxable income.

Section 179 — Glossary — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › SECTION 179 · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM Section 179 Election under IRC §179 to immediately expense the cost of qualifying property in the year of placement, rather than depreciating it over the MACRS recovery period. 2026 dollar limit is $1,290,000; phased out above $3,220,000 of qualifying investment; capped by taxable income. STATUTE BASIS · IRC §179 In context §179 and §168(k) bonus depreciation are often compared, but the mechanics differ: §179 §168(k) bonus Cap $1.29M (2026 dollar limit) None Phase-out $3.22M–$4.51M investment None Income limit Yes — cannot create loss None — can create loss Election Required (Form 4562) Default (opt-out election) Asset granularity Asset-by-asset Class-by-class §179 cannot create a net loss — the deduction is capped at the taxpayer’s aggregate taxable income from any active trade or business. Excess §179 carries forward indefinitely. §168(k) has no such cap. See /section-179/ for the topic hub. RELATED TERMS macrs bonus depreciation qualified improvement property EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Section 481(a) Adjustment — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/section-481a/
Description: The cumulative-correction mechanism that captures the difference between an old method of accounting and a new method, taken as a single adjustment in the year of change. Under IRC §481(a) and Rev. Proc. 2015-13, the §481(a) adjustment is the standard procedure for capturing missed depreciation via Form 3115 without amending prior returns.

Section 481(a) Adjustment — Glossary — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › SECTION 481(A) ADJUSTMENT · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM Section 481(a) Adjustment The cumulative-correction mechanism that captures the difference between an old method of accounting and a new method, taken as a single adjustment in the year of change. Under IRC §481(a) and Rev. Proc. 2015-13, the §481(a) adjustment is the standard procedure for capturing missed depreciation via Form 3115 without amending prior returns. STATUTE BASIS · IRC §481(a) · Rev. Proc. 2015-13 In context §481(a) prevents items from being duplicated or omitted when an accounting method changes. The adjustment equals: (Total depreciation that would have been claimed from placed-in-service date through the year before change, under the new method) — (Total depreciation actually claimed under the old method during the same period) For missed depreciation (cost segregation on a previously-acquired property), the §481(a) is negative — additional depreciation deducted in the year of change. The taxpayer does not amend prior returns; the cumulative correction is captured in a single year. §481(a) adjustments of $50,000 or more positive are spread over four tax years under Rev. Proc. 2015-13. Negative adjustments and smaller positive adjustments are taken fully in the year of change. The §481(a) calculation for bonus depreciation uses the bonus rate that applied in the placed-in-service year — not the current rate. A 2023-placed property cost-segregated in 2026 captures 80% bonus on the accelerated buckets, not 100%. See /form-3115/ for the topic hub. RELATED TERMS form 3115 cost segregation bonus depreciation EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Short-Term Rental (STR) — Glossary — IRS Depreciation Rules
URL: https://irsdepreciationrules.com/glossary/short-term-rental/
Description: Rental property with an average customer use period of 7 days or less. Under Treas. Reg. §1.469-1T(e)(3)(ii)(A), an STR is treated as a trade or business — not a

Short-Term Rental (STR) — Glossary — IRS Depreciation Rules A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › GLOSSARY › SHORT-TERM RENTAL (STR) · VOLUME I · 2026 EDITION GLOSSARY ENTRY · DEFINED TERM Short-Term Rental (STR) Rental property with an average customer use period of 7 days or less. Under Treas. Reg. §1.469-1T(e)(3)(ii)(A), an STR is treated as a trade or business — not a 'rental activity' for IRC §469 — so material participation alone (no REPS required) makes losses non-passive. STATUTE BASIS · Treas. Reg. §1.469-1T(e)(3)(ii)(A) In context The STR ≤7-day test is on average customer use — total days of all customer rentals divided by the number of rentals. A property with 50 stays averaging 5 nights qualifies. A property with 12 stays averaging 14 nights does not. The mechanism: rental activities under §469(c)(2) are passive regardless of participation. STR ≤7-day average is excluded from “rental activity” by Reg. §1.469-1T(e)(3) — it’s treated as a trade or business. Trade-or-business losses are non-passive when the taxpayer materially participates (any of the seven §1.469-5T(a) tests). For STR operators, test 3 (>100 hours and more than any other individual) is the typical qualification path — personally managing bookings, communications, cleaning oversight, and maintenance with no third-party manager exceeding the owner’s time. The combination of: STR ≤7-day average (bypasses §469 passive rules) Material participation (under any single test) Cost segregation generating large year-1 paper losses is the “STR loophole” pattern. Losses offset W-2 and active business income directly without REPS qualification. The 7-day test must be tracked on actual stays, not nominal listing periods. A booking marketed as “weekend” but extending to 9 nights counts as 9 nights, not 2. A single long booking can wreck the average for the year. RELATED TERMS passive activity reps material participation cost segregation EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Methodology — How Pages Are Researched, Reviewed, and Maintained
URL: https://irsdepreciationrules.com/methodology/
Description: Editorial methodology for IRS Depreciation Rules. Primary sources, credentialed review, quarterly re-review cadence, errata protocol, and disclosure of the operating relationship.

Methodology — How Pages Are Researched, Reviewed, and Maintained A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › METHODOLOGY · RECORD IDR-METHOD · VOLUME I · 2026 EDITION EDITORIAL METHODOLOGY How pages are researched, reviewed, and maintained. Every page on this site is built from primary sources, reviewed by a named credentialed tax professional, and re-reviewed on a quarterly cadence. The methodology below documents the standards each page is held to. Primary-source hierarchy Every page is built against a defined primary-source hierarchy. When a substantive claim is made on the site, the source is identified at the lowest level of the hierarchy that supports the claim: Statute — the Internal Revenue Code at the section level (e.g., IRC §168(k)(6)) Treasury Regulations — final regs at Title 26 CFR (e.g., Treas. Reg. §1.168(k)-2) Revenue Procedures and Revenue Rulings — formal IRS guidance with precedential weight (e.g., Rev. Proc. 2015-13) Notices and Announcements — IRS guidance documents with operational effect (e.g., Notice 2025-17) IRS Publications — taxpayer-facing publications (e.g., Pub. 946, Pub. 5653) — useful but not authoritative; courts have held that publications cannot bind the IRS or the taxpayer beyond the underlying statute Chief Counsel Advice — informal advice, not precedential but indicative of IRS position Tax Court and federal-court decisions — interpretations of the statute by courts of record Where multiple authorities address the same point, the highest applicable level controls. A regulation that conflicts with a statute is invalid; an IRS notice that conflicts with a regulation is questionable; a publication that conflicts with a notice is non-controlling. Quote and translate When the site presents the substance of a statutory provision, regulation, or IRS guidance, the primary-source text is quoted verbatim in a bordered callout, followed by a plain-English translation. The reader sees the controlling language and the editorial interpretation side-by-side. Direct quotations are limited to the minimum necessary to establish the rule. Where a quotation exceeds 75 words, the page links to the primary source rather than reproducing the text. The full statutory and regulatory texts are publicly available via Cornell LII, irs.gov, and govinfo.gov. Credentialed review Every page is reviewed by a credentialed tax professional before publication. The reviewer: Holds an active CPA license, EA enrollment, or JD-Tax credential Reviews the page for technical accuracy against the cited primary sources Signs off on the page substance, dated at the time of review Is named on the page itself — the page header shows the reviewer name and credential Reviewers are not authors. They review work prepared by the editorial team for technical accuracy. The reviewer's name on the page indicates the page has been technically checked by that named individual against the current state of the law. Dating and re-review cadence Every page shows three dates: Published : original publication date of the page Last reviewed : most recent reviewer sign-off date Next sweep : scheduled next re-review date — quarterly cadence by default Major changes to the law (new statute, new regulation, new revenue procedure, new judicial decision) trigger out-of-cycle re-reviews. When OBBBA was signed in January 2025, every page that touched bonus depreciation was re-reviewed within 30 days of enactment. The change record is in the /changelog/ . Errata protocol The site does not assert that any page is error-free. The standard is that substantive errors — errors that would mislead a CPA relying on the page to advise a client — are corrected within seven calendar days of being reported and verified. The protocol: Reader reports an error to errata@irsdepreciationrules.com with the URL, the specific text, and the basis for believing it is incorrect. The editorial team reviews the report against the cited primary source. If the report is verified, the page is corrected and the change is logged in the changelog with the reporter's initials (or "anonymous" if requested). If the report is not verified (the page is correct as written), the reporter is sent an explanation citing the controlling authority. The protocol is the same regardless of whether the error is procedural (a wrong date), interpretive (a misreading of statute), or stylistic (an unclear sentence). The seven-day window is the commitment. What this site is not Not legal advice. The site is an editorial reference. It does not constitute legal, tax, or financial advice. A taxpayer relying on a page in connection with a return should verify the underlying primary source and consult a professional. Not a calculator. The site does not provide computational tools that determine tax liability. Calculators exist on other sites (referenced sparingly in editorial citations) — this site is the reference, not the calculator. Not a marketing channel. The site does not sell anything. It is operated as a service to the practitioner community. The relationship with Cost Seg Smart LLC is disclosed in the footer of every page; conversion mechanics are limited to occasional editorial citations to relevant operational tools. Disclosure of operating relationship IRS Depreciation Rules is operated by Cost Seg Smart LLC , an American cost segregation provider. The operating company funds the editorial team and provides the engineering team that contributes to worked-example sections. On a small number of pages — those that touch operational application of a rule (cost segregation studies, Form 3115 filings, REPS analysis) — the page may include at most one inline editorial citation to a Cost Seg Smart-network property where a worked example, calculator, or decision tool genuinely helps the visitor's next step. The citations are: Editorial in style — short, link-only, no promotional copy or callout boxes Limited to one per page maximum Reviewed under the same editorial standard as the rest of the page UTM-tagged ( utm_source=irsdepreciationrules ) for attribution but not for promotion The footer of every page discloses the operating relationship: "Editorial. Not legal, tax, or financial advice. Operated by Cost Seg Smart LLC, an automated cost segregation provider." EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5

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## Sources — Primary Source List
URL: https://irsdepreciationrules.com/sources/
Description: Complete list of primary sources cited across IRS Depreciation Rules. Statute, regulations, revenue procedures, IRS notices, publications, legislation, judicial decisions, and chief counsel advice.

Sources — Primary Source List A PUBLIC REFERENCE FOR FEDERAL DEPRECIATION LAW · OPEN ACCESS · NO LOGIN RSS LLMS.TXT SITE REVIEW 2026·05·12 BUILD V1.5 irsdepreciationrules .com Home MACRS Bonus §179 Form 3115 Recapture Glossary Reference Search 147 sources… ⌘K HOME › SOURCES · RECORD IDR-SOURCES · VOLUME I · 2026 EDITION PRIMARY SOURCES · 50+ AUTHORITIES Sources cited across the site. Every page links its claims to a primary source — statute, regulation, revenue procedure, IRS notice, publication, legislation, or judicial decision. The full list of authorities cited site-wide is below, grouped by source type. Statute (Internal Revenue Code) IRC §168 — Accelerated Cost Recovery System (MACRS) IRC §168(k) — Special allowance for certain property (bonus depreciation) IRC §179 — Election to expense certain depreciable business assets IRC §263A — Capitalization and inclusion in inventory costs (UNICAP) IRC §469 — Passive activity losses and credits limited IRC §481 — Adjustments required by changes in method of accounting IRC §1031 — Like-kind exchanges of real property IRC §1245 — Gain from dispositions of certain depreciable property IRC §1250 — Gain from dispositions of certain depreciable realty IRC §1411 — Net investment income tax Treasury Regulations Treas. Reg. §1.48-1(c) — Definition of section 38 property — the permanence test for personal property classification Treas. Reg. §1.168(k)-2 — Final regulations on bonus depreciation (TD 9993) Treas. Reg. §1.179-1 — Election to expense certain depreciable property Treas. Reg. §1.446-1(e) — Methods of accounting — changes in method Treas. Reg. §1.469-5T — Material participation tests Treas. Reg. §1.469-9 — Real estate professional rules (REPS aggregation) Treas. Reg. §1.1250-1 — Gain from dispositions of section 1250 property Revenue Procedures Rev. Proc. 87-56 — Asset class table for MACRS (~150 asset classes) Rev. Proc. 2015-13 — Master procedures for automatic and non-automatic changes in accounting method Rev. Proc. 2025-08 — Automatic consent procedures for late §168(k) elections (superseded) Rev. Proc. 2026-08 — Current automatic consent procedures for late §168(k) elections Rev. Proc. 2025-32 — Inflation adjustments for 2026 (§179 dollar limit, phase-out) IRS Notices and Announcements Notice 2025-17 — Binding-written-contract transition rule for OBBBA §168(k) restoration Notice 2025-71 — Transition rule for property under binding contract prior to OBBBA enactment Notice 2026-12 — Placed-in-service date clarification for binding written contracts IRS Publications Pub. 527 — Residential Rental Property Pub. 535 — Business Expenses Pub. 544 — Sales and Other Dispositions of Assets Pub. 925 — Passive Activity and At-Risk Rules Pub. 946 — How to Depreciate Property (2025 edition, OBBBA-incorporated) Pub. 5653 — Cost Segregation Audit Techniques Guide (8 chapters) Legislation Tax Reform Act of 1986 — Established MACRS (replaced ACRS) PATH Act 2015 — Bonus depreciation extension and modifications Tax Cuts and Jobs Act 2017 — §13201 (bonus depreciation 2017 reform); §13202 (§179 expansion); §13303 (§1031 limitation to real property) CARES Act 2020 — §2307 (QIP technical correction restoring 15-year life) One Big Beautiful Bill Act 2025 (OBBBA) — §70302 (permanent 100% bonus depreciation restoration); §70303 (§179 dollar limit); §70304 (QIP confirmation) Judicial decisions Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997) — Seminal cost segregation case; established the building-component classification framework under MACRS Whiteco Industries v. Commissioner, 65 T.C. 664 (1975) — Six-factor permanence test for personal property classification Chief Counsel Advice CCA 202612008 — QIP eligibility for owner-occupied portions of mixed-use buildings EDITORIAL · NOT LEGAL OR TAX ADVICE · OPERATED BY COST SEG SMART LLC METHODOLOGY · SOURCES · CHANGELOG · EDITORIAL · RSS · LLMS.TXT © 2026 · BUILD V1.5