MACRS and Asset Classification: The Complete Guide for STR Investors

Cost segregation works because MACRS — the IRS depreciation system — treats different types of property differently. Furniture depreciates faster than walls. Driveways depreciate faster than roofs. A cost segregation study is essentially the process of correctly applying MACRS to every component of your property — and the difference between applying it correctly versus incorrectly can be worth six figures in year-one tax savings.

This guide builds your complete understanding of MACRS: what it is, how the property classes work, what goes into each category for an STR, the conventions that affect first-year deductions, depreciation recapture at sale, and the critical land allocation rules.

What Is MACRS?

The Modified Accelerated Cost Recovery System (MACRS) replaced ACRS in 1986 and is the required depreciation method for most tangible property placed in service in the U.S. after that date. MACRS has two subsystems: GDS (General Depreciation System) and ADS (Alternative Depreciation System). Most investors use GDS because it provides faster deductions.

MACRS assigns each asset to a property class with a specified recovery period and depreciation method. The recovery period is the number of years over which you deduct the asset's cost. The method (200% declining balance, 150% declining balance, or straight-line) determines how much you deduct each year within that period.

The MACRS Property Classes for STR Investors

What Goes Into 5-Year Property

5-year property is personal property — tangible property that is not real property. In an STR context, this primarily means everything movable or not permanently affixed to the building structure: all freestanding furniture, appliances (refrigerators, washers, dryers, ranges), electronics (TVs, streaming devices), decorative items, rugs, and certain non-structural specialized components identified by the engineer.

5-year property qualifies for 100% bonus depreciation under the OBBBA — meaning the entire value is expensed in the year the property is placed in service. This is why furnished STRs have significantly higher cost segregation deductions than unfurnished properties: all that furniture and appliance value moves from 27.5-year to immediate expensing.

What Goes Into 15-Year Property

15-year land improvements are enhancements to the land itself (not the building). Classic examples: paved driveways and parking areas, landscaping (trees, shrubs, sod), fencing, outdoor lighting systems, decks and patios (when not attached to the building structure), pools and spas built into the ground, gazebos and pergolas, and retaining walls.

Like 5-year property, 15-year land improvements qualify for 100% bonus depreciation. For an STR with a hot tub, deck, fire pit, and landscaping, the 15-year bucket can be $30,000–$80,000+ — representing immediate full expensing for each of those assets.

What Stays in 27.5-Year

The building structure — everything permanently attached to and forming part of the building — remains 27.5-year straight-line property. This includes foundation, framing, roof, walls, windows, doors, structural electrical systems, structural plumbing, HVAC as structural components, and built-in cabinetry.

27.5-year property does NOT qualify for bonus depreciation. It must be depreciated straight-line over 27.5 years regardless of any bonus election. The building structure component is why even after a cost seg study, investors still have a substantial annual depreciation deduction from the structure year after year.

Land: The Non-Depreciable Component

Land is never depreciable. It cannot be assigned a recovery period, it doesn't qualify for bonus depreciation, and no depreciation deduction can be taken on it regardless of method. The allocation of purchase price between land and improvements therefore directly determines your total depreciable basis.

The allocation is typically made using the property tax assessment ratio (land value ÷ total assessed value × total purchase price = land basis). In high land-value markets (major urban areas, coastal locations), land can represent 30–50% of total value — significantly reducing the depreciable base compared to lower land-value markets.

The Conventions: How Timing Affects Year-One Deductions

Half-year convention applies to personal property and land improvements: all property is treated as placed in service on July 1 of the acquisition year, giving you half a year's depreciation in year 1 (without bonus). Mid-quarter convention applies instead when more than 40% of personal property basis is placed in service in Q4 — this can reduce year-1 deductions for Q4 assets significantly. Mid-month convention applies to building structure: property is treated as placed in service on the 15th of the acquisition month.

Bonus depreciation overrides the conventions for eligible property — when you apply 100% bonus to a 5-year or 15-year asset, you expense the full amount regardless of what month you acquired it. The conventions matter primarily for the portion of assets not subject to bonus depreciation.

Depreciation Recapture at Sale

Taking accelerated depreciation reduces your adjusted cost basis. At sale, the IRS recaptures the benefit. §1245 recapture applies to 5-year and 15-year assets: all depreciation taken is taxed at ordinary income rates (up to 37%). §1250 unrecaptured gain applies to the building: all straight-line depreciation taken on 27.5-year property is taxed at a maximum 25% rate (better than §1245 but worse than the 15%/20% LTCG rate).

Recapture doesn't make cost segregation a bad deal — the time value advantage of front-loaded deductions almost always wins. But it needs to be planned for, especially if your exit plan involves a taxable sale rather than a §1031 exchange.