MACRS

MACRS (the Modified Accelerated Cost Recovery System) is the depreciation method the IRS requires for almost all rental property placed in service since 1987. For residential rentals it is not actually accelerated: you recover the building's cost in equal yearly amounts over a fixed 27.5-year recovery period, using a mid-month convention for the year you buy and the year you sell.

The key word is building. Land never wears out, so it does not depreciate. You split your basis between land and structure first, then run MACRS only on the structure and on any improvements you add later.

In practice

Say you buy a duplex for $340,000 and your closing costs add $9,000 to basis, so your cost basis is $349,000. The county assessor allocates 20% to land, which leaves $279,200 as depreciable building basis.

Divide $279,200 by 27.5 and you get a full-year deduction of about $10,153. That is the figure you take every full year the property is in service. The first year is prorated by the mid-month convention: if you place the duplex in service in May, the IRS treats it as mid-May, so you get 7.5 of 12 months, which is $279,200 ÷ 27.5 × (7.5 ÷ 12), or roughly $6,346. The remaining half-month rolls into a 28th year at the tail end of the schedule.

That single line, computed correctly, lowers your taxable rental income by about $10,000 a year without costing you a dollar of cash. It is also the figure that comes back as depreciation recapture when you sell, so the number you take now has to be the number you can defend later.

Why it matters to a small landlord

MACRS is the largest non-cash deduction most landlords ever claim, and it is the one people most often get wrong by forgetting to take it or by depreciating the land. Both are expensive: skip the deduction and you overpay tax every year, then still owe recapture at sale as if you had taken it. Get the land split or the in-service date wrong and your whole schedule drifts off by hundreds of dollars annually. The full mechanics, including the year-by-year table, live in rental property depreciation, and the figure lands on Schedule E line 18every April. You can sanity-check your own number in the depreciation calculator before it goes on the return.

MACRS sits next to a few terms worth knowing together. Your cost basis sets the dollar amount the 27.5-year clock runs on, bonus depreciation can front-load part of the recovery on shorter-lived components, and a cost segregation study is what identifies those shorter-lived components in the first place. Get the basis right and the rest of the schedule follows.