What Is MACRS Depreciation? The IRS System Explained for Property Owners
MACRS (Modified Accelerated Cost Recovery System) is the IRS's required method for depreciating property. It assigns every type of asset to a property class with a specific recovery period — 5 years, 15 years, 27.5 years, etc. Cost segregation works by correctly applying MACRS to every component of your rental.
Every rental property owner depreciates their property — but most do it the slow way: straight-line over 27.5 years. MACRS is actually a much more nuanced system that allows faster depreciation for many components. Understanding it is the key to understanding why cost segregation generates such large deductions.
The MACRS Property Classes
| Class | Recovery Period | Depreciation Method | STR Examples |
|---|---|---|---|
| 5-year | 5 years | 200% Declining Balance | Furniture, appliances, carpets, electronics |
| 7-year | 7 years | 200% Declining Balance | Office furniture, certain equipment |
| 15-year | 15 years | 150% Declining Balance | Driveways, landscaping, pools, fences, decks |
| 27.5-year | 27.5 years | Straight-Line | Residential building structure |
| 39-year | 39 years | Straight-Line | Commercial building structure |
The key insight: when you buy a rental property, the purchase price includes components from every row of this table. A kitchen contains both real property (the walls, plumbing rough-in) and personal property (the appliances, removable cabinets). MACRS requires each component to be assigned to its correct class — but most property owners never separate them.
GDS vs. ADS: Which System Applies?
MACRS has two sub-systems: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). GDS provides faster deductions and is the default for most rental properties. ADS is required in certain situations (foreign-use property, electing-farm corporations, listed property below 50% business use, and for some qualified business income calculations).
For most STR investors, GDS applies throughout. If you have a mixed-use property (personal + rental), you may need to track GDS vs. ADS separately depending on the percentage of business use.
How Cost Segregation Uses MACRS
A cost segregation study is essentially a detailed engineering analysis that applies MACRS correctly to every identifiable component of your property. Instead of treating the entire $600,000 purchase price as 27.5-year real property, the study might identify $120,000 in 5-year personal property, $60,000 in 15-year land improvements, and $420,000 in 27.5-year real property.
With 100% bonus depreciation, the $120,000 + $60,000 = $180,000 in shorter-life property is deducted entirely in year one. The $420,000 continues at $15,272/year for 27.5 years. Without cost seg, the entire $600,000 would depreciate at $21,818/year — generating $8+ million less in early-year cash flow at a 37% tax rate.
Frequently Asked Questions
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