Practitioner Quick Answer: Under IRC Section 168 and Rev. Proc. 87-57, real estate cost segregation moves building components out of 27.5-year residential (3.636%/yr) or 39-year commercial (2.564%/yr) straight-line tables into 5-year personal property (200% declining balance: 20.00% Year 1, 32.00% Year 2) and 15-year property (Asset Class 00.3 land improvements at 150% DB, or IRC Section 168(e)(6) Qualified Improvement Property [QIP] for interior non-structural commercial leasehold improvements over 15 years). Because 5-year and 15-year classes have a recovery period of 20 years or less, they qualify for 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025 (compared with 40% for property acquired before January 20, 2025, under Public Law 119-21 Section 70301).
Quick Year-1 Depreciation & Safe Harbor Estimator
Pick a preset or adjust 2 inputs to compare Year-1 deductions instantly.
1. Complete 5-Year & 15-Year MACRS Percentage Tables (Rev. Proc. 87-57, Table A-1 Half-Year Convention)
When a cost segregation study reclassifies interior fixtures, carpeting, cabinetry, and specialty electrical into 5-year personal property (Asset Class 57.0), or reclassifies site paving, fencing, and landscaping into 15-year land improvements (Asset Class 00.3), those components follow IRS Publication 946 Table A-1 under the General Depreciation System (GDS) half-year convention on any basis not expensed via bonus depreciation:
| Recovery Year | 5-Year Property (200% DB, Half-Year) | 7-Year Property (200% DB, Half-Year) | 15-Year Land Improvements (150% DB, Half-Year) | 15-Year QIP (Straight-Line, Half-Year) |
|---|---|---|---|---|
| Year 1 | 20.00% | 14.29% | 5.00% | 3.33% |
| Year 2 | 32.00% | 24.49% | 9.50% | 6.67% |
| Year 3 | 19.20% | 17.49% | 8.55% | 6.67% |
| Year 4 | 11.52% | 12.49% | 7.70% | 6.67% |
| Year 5 | 11.52% | 8.93% | 6.93% | 6.67% |
| Year 6 | 5.76% | 8.92% | 6.23% | 6.67% |
| Years 7-15 (each) | - | 8.93% (Yr 7) / 4.46% (Yr 8) | 5.90% / 5.91% | 6.67% / 6.66% |
| Year 16 | - | - | 2.95% | 3.33% |
| Total Recovery | 100.00% | 100.00% | 100.00% | 100.00% |
Even under standard MACRS without bonus depreciation (for example, when electing out of bonus depreciation or calculating state taxable income in a state that decouples from federal IRC Section 168(k)), 5-year MACRS recovers 71.20% of basis in the first 3 tax years, compared with just 9.242% under 27.5-year residential straight-line (1.970% Year 1 June mid-month plus 3.636% in Years 2 and 3; up to 10.757% for a January placement) or 6.519% under 39-year commercial straight-line (1.391% Year 1 June mid-month plus 2.564% in Years 2 and 3; up to 7.589% for a January placement).
2. 27.5-Year Residential & 39-Year Commercial Mid-Month Tables (Tables A-6 & A-7a)
Structural real property uses the mid-month convention under IRC Section 168(d)(2), meaning Year-1 straight-line depreciation is prorated based on the month the building is placed in service:
| Month Placed in Service | 27.5-Yr Residential Year 1 | 27.5-Yr Annual Rate (Yrs 2-27) | 39-Yr Commercial Year 1 | 39-Yr Annual Rate (Yrs 2-39) |
|---|---|---|---|---|
| January (Month 1) | 3.485% | 3.636% | 2.461% | 2.564% |
| March (Month 3) | 2.879% | 3.636% | 2.033% | 2.564% |
| June (Month 6) | 1.970% | 3.636% | 1.391% | 2.564% |
| September (Month 9) | 1.061% | 3.636% | 0.749% | 2.564% |
| December (Month 12) | 0.152% | 3.636% | 0.107% | 2.564% |
If you close on a $2,000,000 commercial property ($1,600,000 depreciable building basis) in December without cost segregation, your Year-1 deduction is only 0.107% ($1,712). Reclassifying 28% ($448,000) into 5-year and 15-year property via cost segregation unlocks a $448,000 Year-1 deduction under the 100% bonus depreciation branch (for property acquired and placed in service after January 19, 2025).
3. Qualified Improvement Property (QIP) & Leasehold Improvements: 15-Year Life Explained
What is the depreciation life of leasehold improvements? Under IRC Section 168(e)(6) and Section 168(e)(3)(E)(vii), Congress consolidated the old leasehold, retail, and restaurant categories into Qualified Improvement Property (QIP) with a 15-year GDS straight-line recovery period (20-year ADS) and full bonus depreciation eligibility.
To qualify as 15-year QIP, an improvement must meet four statutory tests:
- Made by the Taxpayer (Treas. Reg. 1.168(b)-1(a)(5)): You must build or fund the improvement after acquiring the building. Existing interior build-outs acquired as part of a building purchase are not QIP; they require a cost segregation study to separate 5-year and 15-year components from the 39-year acquisition basis.
- Interior Portion of the Building: Drywall partitions, acoustic ceilings, interior lighting, interior doors, restroom plumbing, and interior flooring.
- Nonresidential Real Property (39-Year Buildings & Transient STRs): Applies to commercial offices, retail, warehouses, medical build-outs, restaurants, hotels, and short-term rentals with average stays of 30 days or less. Long-term 27.5-year residential apartments do not qualify for QIP.
- Placed in Service After the Building Was First Placed in Service: Ground-up initial construction before the building's first Certificate of Occupancy does not qualify as QIP.
The 3 Statutory Exclusions Under IRC Section 168(e)(6)(B)
Even inside a commercial remodel, three categories of costs are excluded from QIP and remain 39-year property:
- Building Enlargements (IRC Sec. 168(e)(6)(B)(i)): Expanding the building perimeter or adding square footage volume.
- Elevators and Escalators (IRC Sec. 168(e)(6)(B)(ii)).
- Internal Structural Framework (IRC Sec. 168(e)(6)(B)(iii)): Load-bearing walls, columns, beams, girders, trusses, and floor joists.
For full year-by-year MACRS tables and QIP engineering breakdowns, see Modern CFO's MACRS Depreciation Tables guide and Qualified Improvement Property (QIP) Leasehold Guide.
Frequently Asked Questions: MACRS Tables & Qualified Improvement Property (QIP)
Q: What is the depreciation life of leasehold improvements under MACRS? A: Under IRC Section 168(e)(6), interior non-structural leasehold improvements made by the taxpayer to nonresidential real property after the building was first placed in service qualify as Qualified Improvement Property (QIP) with a 15-year MACRS recovery period (and qualify for 100% bonus depreciation when acquired and placed in service after January 19, 2025, or 40% when acquired before January 20, 2025). Even if a commercial lease is only 5 or 7 years, IRC Section 168(i)(8) requires leasehold improvements to be depreciated over their statutory 15-year QIP or 5-year personal property MACRS recovery period rather than the lease term.
Q: Why does the 5-year MACRS depreciation table take 6 tax years to reach 100%? A: Under the IRC Section 168(d)(1) half-year convention (IRS Table A-1), 5-year property claims half of a full year's depreciation in Year 1 (20.00%), full years in Years 2 through 5 (32.00%, 19.20%, 11.52%, and 11.52%), and the remaining half-year in Year 6 (5.76%).
Q: Do renovations to a 27.5-year multifamily apartment building qualify as 15-year QIP? A: No. IRC Section 168(e)(6) restricts Qualified Improvement Property to nonresidential real property. However, a renovation cost segregation study on a residential apartment building can still reclassify appliances, carpeting, LVP flooring, cabinetry, blinds, and dedicated fixtures as 5-year MACRS personal property (Asset Class 57.0) and exterior site work as 15-year land improvements (Asset Class 00.3).
Related Calculators & Practitioner Guides
- Interactive Cost Segregation Tax Savings Calculator
- 2026 De Minimis Safe Harbor Election ($2,500 / $5,000 Rule) Guide
- Short-Term Rental Interior Improvements & 15-Year QIP Guide
- Cost Segregation vs. Straight-Line Depreciation Comparison
- Cost Segregation for Construction & Renovation Guide
- Section 1245 vs. 1250 Depreciation Recapture Exit Analysis
See Your Property's Tax Savings
Drop your address. The AI estimates your depreciation savings in 60 seconds, backed by a certified engineer study.
Free cost segregation estimate, engineer-certified studies, and ongoing depreciation tracking.
Backed by $1B+ in supported tax depreciation.