24 TERMS · ALPHABETICAL

Depreciation glossary

Plain-English definitions of the terms used across federal depreciation law. Each entry includes the statute basis, in-context usage, and cross-references to related terms.

B C D F G H L M P Q R S

B

Basis — A taxpayer's economic investment in property for tax purposes. Initial basis is generally cost (IRC §1012); basis is adjusted upward by capitalized improvements and downward by depreciation, casualty losses, and other items under IRC §1016. Basis is the starting point for every depreciation calculation.
Bonus Depreciation — First-year additional depreciation under IRC §168(k). Allows a percentage of the adjusted basis of qualifying property to be deducted in the year of placement. Currently 100% under OBBBA for property placed in service after January 19, 2025.

C

Class Life — The midpoint useful life assigned to an asset under the Asset Depreciation Range (ADR) system, codified for current law in Rev. Proc. 87-56. Each property's class life determines its MACRS recovery period under both GDS and ADS — it is the conceptual root of every depreciation schedule.
Cost Segregation — An engineering-based methodology for partitioning the depreciable basis of a building into MACRS class lives shorter than the default 27.5- or 39-year recovery period. Components reclassified to 5-, 7-, or 15-year property accelerate depreciation deductions and, where eligible, qualify for §168(k) bonus depreciation.

D

Depreciable Basis — The portion of a property's adjusted basis subject to depreciation under IRC §167 and §168. Generally equal to the property's cost less the value allocated to land. Land itself is never depreciable; the depreciable basis is the building plus building improvements.
Depreciation Recapture — The recharacterization of gain on disposition of depreciable property from capital gain to ordinary income (under IRC §1245) or to unrecaptured §1250 gain taxed at a maximum 25% rate (under IRC §1250). Recapture limits the long-term capital-gain treatment of depreciation previously deducted.

F

Form 3115 — IRS Application for Change in Accounting Method. The form a taxpayer files to change a method of accounting — including depreciation method changes following a cost segregation study on a previously-acquired property. Automatic consent procedures for most depreciation method changes are published in Rev. Proc. 2015-13 and subsequent updates.

G

GDS vs ADS — Two depreciation regimes under MACRS. GDS (General Depreciation System) is the default — declining-balance method, shorter recovery periods. ADS (Alternative Depreciation System) is straight-line with longer recovery periods, required for tax-exempt-use property, listed property under 50% business use, and the real property of a §163(j) electing trade or business.

H

Half-Year Convention — MACRS averaging convention treating all property placed in service during the year as placed in service at the midpoint. Half a year of depreciation in year 1, half in the year of disposition. Applies to most personal property unless mid-quarter is required.

L

Land Allocation — The partitioning of a real property's total basis between non-depreciable land and depreciable improvements. Land allocation is a prerequisite to every depreciation calculation because land is not depreciable under IRC §167. Common methods include the tax-assessor ratio, an independent appraisal, and a residual method.

M

MACRS — The Modified Accelerated Cost Recovery System — the depreciation method required by IRC §168 for most tangible property placed in service after December 31, 1986. Assigns a class life and recovery period to each asset and applies a method (declining-balance or straight-line) and convention (half-year, mid-quarter, or mid-month).
Material Participation — The IRC §469 test for whether a taxpayer is non-passive in a trade or business. Treas. Reg. §1.469-5T(a) provides seven tests; satisfying any one is sufficient. The most-used: >500 hours in the activity, or >100 hours and more than any other individual.
Mid-Month Convention — The MACRS placed-in-service convention applied to all real property — residential rental (27.5 years), nonresidential real (39 years), and qualified improvement property (15 years). Each real-property asset is treated as placed in service at the midpoint of the month it was actually placed in service.
Mid-Quarter Convention — The MACRS placed-in-service convention applied when more than 40% of a taxpayer's depreciable basis in personal property is placed in service during the fourth quarter of the tax year. Each asset is then treated as placed in service at the midpoint of the quarter it was actually placed in service.

P

Passive Activity — Under IRC §469, a trade or business activity in which the taxpayer does not materially participate, or — with limited exceptions — any rental activity. Losses from passive activities can offset only passive income; suspended losses carry forward indefinitely and release on disposition. The §469 rules are the primary gating mechanism for cost segregation deductibility.

Q

Qualified Improvement Property — Improvement to the interior portion of a nonresidential building made after the building was first placed in service. QIP has a 15-year MACRS recovery period and qualifies for §168(k) bonus depreciation. Defined at IRC §168(e)(6); excludes enlargements, elevators/escalators, and internal structural framework.

R

Recovery Period — The number of years over which depreciation is taken for a particular MACRS class. Real estate has 27.5-year (residential rental) or 39-year (nonresidential) recovery periods; personal property uses 3, 5, 7, 10, 15, or 20 years.
REPS — Real Estate Professional Status — Status under IRC §469(c)(7) that allows a taxpayer who spends >50% of personal service time and >750 hours per year in real property trades or businesses to treat rental real estate as non-passive when material participation is demonstrated. Used to apply cost-segregation losses against active income.

S

Section 1245 Property — Tangible personal property — equipment, FF&E, and the 5-year, 7-year, and 15-year components reclassified through cost segregation. On disposition, depreciation is recaptured under IRC §1245 as ordinary income at rates up to 37%.
Section 1250 Property — Real property — buildings and structural components. On disposition under MACRS, §1250 ordinary-income recapture is almost always zero (because MACRS real property uses straight-line). The bulk of gain is 'unrecaptured §1250 gain,' taxed at a 25% maximum rate.
Section 179 — Election under IRC §179 to immediately expense the cost of qualifying property in the year of placement, rather than depreciating it over the MACRS recovery period. 2026 dollar limit is $1,290,000; phased out above $3,220,000 of qualifying investment; capped by taxable income.
Section 263A (UNICAP) — The Uniform Capitalization rules of IRC §263A. Requires capitalization of direct costs and a properly allocable share of indirect costs to (a) property produced by the taxpayer and (b) real or personal property acquired by the taxpayer for resale. §263A interacts with cost segregation for self-constructed and improved real property.
Section 481(a) Adjustment — The cumulative-correction mechanism that captures the difference between an old method of accounting and a new method, taken as a single adjustment in the year of change. Under IRC §481(a) and Rev. Proc. 2015-13, the §481(a) adjustment is the standard procedure for capturing missed depreciation via Form 3115 without amending prior returns.
Short-Term Rental (STR) — Rental property with an average customer use period of 7 days or less. Under Treas. Reg. §1.469-1T(e)(3)(ii)(A), an STR is treated as a trade or business — not a 'rental activity' for IRC §469 — so material participation alone (no REPS required) makes losses non-passive.