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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Rental real estate depreciation undergoes a makeover
Tax Talk

Figuring real estate depreciation

Dear Tax Talk:
I have a rental property that was placed in service in July 1986. Since then, I have used 19 years as the depreciation period. In September 2007 my tenant moved out, and I plan to remodel the whole house for a total cost of $30,000. I just wonder over how many years I should depreciate this improvement?
-- Tse

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Dear Tse,
Everything old is new again. Not only is the house due for a makeover, but your depreciation method is as well. Until 1986, residential and commercial rental property was depreciated on an accelerated basis over 19 years. In the early '80s, the depreciation period was as short as 15 years.

Depreciation was figured under the accelerated cost recovery system, or ACRS, pronounced like "acres." Back then, properties were built just because they made great tax shelters: You could write off the cost in less than half the time it took you to pay off the mortgage, and on an accelerated basis, most of the deductions were in the early years. ACRS was one of the reasons cited for the savings and loan debacle of that decade.

We don't have as many savings and loan associations anymore and neither do we have accelerated depreciation for real property, yet the real estate market has come full circle. ACRS has been changed to and is now known as the modified accelerated cost recovery system, or MACRS, pronounced "makers."

Any additions or improvements placed in service after 1986, including any components of a building, such as plumbing, wiring, storm windows, etc., are depreciated using MACRS. It does not matter that the underlying property is depreciated under ACRS or is fully depreciated.

Under MACRS, residential rental property and structural improvements are depreciated over a recovery period of 27.5 years on a straight-line basis, or 3.6 percent of cost per year. Appliances, depreciated over five years, and landscaping and paving, depreciated over 15 years, have separate recovery periods and should be segregated for computing depreciation. See Publication 946 for more information and depreciation tables.

Bankrate.com's corrections policy -- Posted: Oct. 9, 2007
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