14 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
- 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.
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.
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.
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.
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 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.