LLC Depreciation Guide — MACRS, Straight-Line, Recapture, and 1031 Exchanges (2026)

Before you start

What to know first

Depreciation is the IRS-approved method for recovering the cost of a business asset over its useful life. Instead of deducting the full purchase price in the year of acquisition (that is Section 179 or bonus depreciation), standard depreciation spreads deductions over the asset's class life. The Modified Accelerated Cost Recovery System (MACRS) is the required depreciation method for most tangible property placed in service after 1986.
MACRS property classes by useful life: 3-year property (race horses, certain tools — 200% declining balance); 5-year property (computers, vehicles, office equipment, research equipment — 200% declining balance); 7-year property (office furniture, fixtures, most machinery without a designated class life — 200% declining balance); 15-year property (land improvements: sidewalks, driveways, fences, landscaping — 150% declining balance); 27.5-year property (residential rental real estate — straight-line); 39-year property (nonresidential commercial real estate — straight-line). IRS Publication 946, Appendix B contains the complete asset class table.
Straight-line depreciation spreads cost evenly: annual deduction = (cost − salvage value) ÷ useful life. Straight-line is required for 27.5-year residential rental and 39-year commercial real property under MACRS. For personal property, the 200% declining balance (double declining balance) under MACRS accelerates deductions into earlier years — first-year deduction is twice the straight-line rate applied to the undepreciated balance, switching to straight-line when straight-line produces a larger deduction.
Half-year convention: most MACRS personal property is treated as placed in service at the midpoint of the tax year regardless of the actual date. This means year 1 provides half a year of depreciation, and the recovery period extends one additional year (a 5-year asset is depreciated over 6 tax years). The half-year convention applies when 40% or less of total depreciable property (excluding real property) is placed in service in the last quarter of the tax year.
Mid-quarter convention: if more than 40% of depreciable personal property (by basis) is placed in service in the last quarter of the tax year, the mid-quarter convention applies to ALL personal property placed in service that year. Under the mid-quarter convention, each asset is treated as placed in service at the midpoint of the quarter in which it was actually placed in service. This produces smaller first-year deductions for assets placed in service in Q1/Q2 (earlier convention) and eliminates the half-year simplification. Monitor year-end purchases carefully — placing a large asset in service in Q4 can trigger the mid-quarter convention for all personal property acquired that year.
Depreciation recapture: when you sell depreciable business property at a gain, the IRS recaptures previously claimed depreciation as ordinary income, not capital gain. Section 1245 property (personal property — equipment, machinery, vehicles, computers) recapture: all accumulated depreciation is recaptured as ordinary income to the extent of the gain. Section 1250 property (real property — buildings): 'additional' depreciation beyond straight-line is recaptured as ordinary income for property placed in service before 1987; for post-1986 real property depreciated straight-line under MACRS, §1250 recapture is generally $0. However, §1(h)(1)(D) of the Code imposes a 25% maximum rate on 'unrecaptured §1250 gain' — the portion of the real property gain equal to accumulated straight-line depreciation. This is often called the 25% recapture rate for real estate.
Like-kind exchange (1031 exchange) defers tax on gain — including depreciation recapture — when business or investment property is exchanged for similar property. Rules: both the relinquished and replacement properties must be held for business or investment purposes; a qualified intermediary must hold exchange proceeds; replacement property must be identified within 45 days and acquired within 180 days of the sale. The replacement property takes a carryover basis (the relinquished property's adjusted basis), so deferred recapture remains embedded in the replacement property's basis and will eventually be recognized upon a taxable disposition. A 1031 exchange can be combined with depreciation to build long-term deferral strategies, particularly in real estate.

Documents

What you'll need

Asset purchase documents — dealer invoices, purchase agreements, or closing statements showing cost, in-service date, and description of property
IRS asset class determination — identify each asset's MACRS property class using IRS Publication 946, Appendix B (or Rev. Proc. 87-56); needed for form 4562 Part III
Prior year Form 4562 — required in all subsequent years to carry forward depreciation schedules and track remaining adjusted basis for each asset
Real property closing statement (HUD-1 / CD) — for buildings: separates land value (non-depreciable) from building value (depreciable); land allocation is required to establish depreciable basis
Cost segregation study (optional, for real property) — engineering report that segregates building components into 5/7/15-year personal property and land improvements for accelerated depreciation
1031 exchange documentation — if a 1031 exchange was completed: qualified intermediary agreement, 45-day identification letter, 180-day exchange completion documentation, and carryover basis calculation from the relinquished property

Process

Step by step

Identify each asset's MACRS property class and depreciable basis For each business asset placed in service during the year: (1) Determine the MACRS property class using IRS Publication 946, Appendix B. Most office equipment, computers, and vehicles are 5-year property. Most machinery and office furniture are 7-year property. Land improvements (sidewalks, parking lots, fences) are 15-year property. Commercial buildings are 39-year property. Residential rental buildings are 27.5-year property. (2) Calculate depreciable basis: purchase price + sales tax + freight + installation − any Section 179 or bonus depreciation claimed. For real property: total cost minus land value (land is never depreciable). (3) Record the date placed in service — this determines the depreciation convention (half-year or mid-quarter for personal property; mid-month for real property).
Determine the applicable depreciation convention For personal property (equipment, vehicles, furniture): Calculate the 40% test — if the total MACRS personal property placed in service in Q4 exceeds 40% of all MACRS personal property placed in service during the year (by cost basis), apply the mid-quarter convention to all personal property. Otherwise, apply the half-year convention. For real property (buildings): always use the mid-month convention — the property is treated as placed in service at the midpoint of the calendar month in which it is actually placed in service. A building placed in service on April 10 receives 8.5 months of depreciation in year 1 (mid-April through December).
Calculate annual MACRS deductions using IRS percentage tables IRS Publication 946, Appendix A provides percentage tables for each MACRS property class under both conventions. Example for 5-year property under the half-year convention (200% DB): Year 1: 20.00%, Year 2: 32.00%, Year 3: 19.20%, Year 4: 11.52%, Year 5: 11.52%, Year 6: 5.76%. Multiply the percentage by the original depreciable basis (not the declining balance — the IRS tables already incorporate the switch from declining balance to straight-line). For straight-line methods (27.5-year and 39-year): annual deduction = depreciable basis × applicable percentage from the mid-month convention tables in Publication 946.
Evaluate Section 179 and bonus depreciation elections (and their interaction) Before calculating MACRS depreciation, determine whether to elect Section 179 expensing or bonus depreciation (see the separate Section 179 guide). Section 179 and bonus depreciation are claimed before MACRS — they reduce the depreciable basis subject to MACRS. The interaction: (1) Apply §179 first — deduct up to the §179 annual limit from the asset's basis. (2) Apply bonus depreciation — deduct the applicable percentage (20% for 2026 per TCJA phase-down) of the remaining adjusted basis. (3) Apply MACRS — depreciate the remaining adjusted basis (after §179 and bonus) over the MACRS class life. For many LLC owners, §179 and bonus depreciation fully expense assets in year 1, leaving $0 MACRS basis in subsequent years.
Track depreciation recapture exposure for each asset Maintain a depreciation schedule that tracks cumulative depreciation claimed on each asset. This is critical for recapture calculation on sale. For §1245 property (equipment, vehicles): recapture = the lesser of (a) the gain on sale or (b) all accumulated depreciation claimed. Recaptured amount is ordinary income. Example: equipment purchased for $30,000, fully depreciated to $0 basis via §179, sold for $8,000 — all $8,000 of gain is §1245 recapture taxed as ordinary income. For §1250 property (real estate, straight-line): §1250 recapture is $0 for post-1986 MACRS property, but all accumulated straight-line depreciation is taxed at 25% (unrecaptured §1250 gain) rather than the preferential long-term capital gains rate.
Report depreciation on Form 4562 and applicable business return Complete IRS Form 4562, Depreciation and Amortization: Part I — Section 179 election (dollar limit and business-income limit). Part II — Bonus depreciation (listed property and non-listed property). Part III — MACRS depreciation (non-listed property; columns for property class, date placed in service, basis, recovery period, method, convention, and percentage). Part V — Listed property (vehicles, computers used for business). The total from Form 4562 flows to: Schedule C line 13 (SMLLC), Form 1065 line 16 (partnership), or Form 1120-S line 14 (S-Corp). Maintain Form 4562 and supporting schedules for the entire depreciation period plus 3 years.

Costs

What it costs

Item	Amount	Notes
IRS Form 4562 — Depreciation and Amortization	$0 filing fee	Form 4562 is required to claim MACRS depreciation, Section 179, and bonus depreciation. Filed with your annual return (Schedule C for SMLLCs, Form 1065 for partnerships, Form 1120-S for S-Corps). Included in TurboTax Self-Employed and H&R Block Self-Employed at no additional cost.
Depreciation schedule software or CPA — fixed asset tracking	$0–$500/year	QuickBooks, Wave, and most accounting software include basic depreciation tracking. For larger portfolios (multiple real property assets, mixed-use), a CPA or fixed-asset software (BNA Fixed Assets, Bloomberg Tax Fixed Assets) is recommended. Cost: $0 for DIY via IRS tables in Publication 946; $200–$500/year for dedicated fixed-asset software.
CPA consultation — depreciation strategy and 1031 exchange planning	$300–$1,000 one-time; $150–$400/year ongoing	Depreciation method elections (ADS vs. GDS, MACRS vs. straight-line), cost segregation studies for real property, 1031 exchange structuring, and recapture planning require CPA involvement for all but the simplest asset portfolios.
Cost segregation study — accelerate real property depreciation	$3,000–$15,000 one-time	A cost segregation study (performed by a CPA or engineering firm) reclassifies components of a commercial building from 39-year to 5/7/15-year property — dramatically accelerating depreciation deductions. Worthwhile for properties over $500K in cost; typical first-year tax savings exceed the study cost by 3–10×.

FAQ

Common questions

What is the difference between MACRS and straight-line depreciation?

MACRS (Modified Accelerated Cost Recovery System) is the IRS-required depreciation method for most business property placed in service after 1986. For personal property (equipment, vehicles, furniture), MACRS uses the 200% declining balance method — which front-loads deductions, giving you larger deductions in early years and smaller deductions later. For real property (buildings), MACRS requires straight-line depreciation — equal annual deductions over the recovery period (27.5 years for residential rental, 39 years for commercial). Straight-line is also available as an election for personal property if you prefer consistent annual deductions — but most LLC owners choose MACRS for personal property because the accelerated deductions reduce current-year taxes.

What is the MACRS recovery period for common business assets?

IRS Publication 946, Appendix B lists all asset classes. Common examples: computers, peripherals, office technology = 5 years; business vehicles = 5 years; office furniture and fixtures = 7 years; most machinery and equipment without a specific class life = 7 years; land improvements (sidewalks, parking lots, fences, landscaping) = 15 years; residential rental buildings = 27.5 years; commercial buildings and structural improvements = 39 years. When an asset doesn't have a specific class life, it defaults to 7-year property. The recovery period determines the depreciation percentage tables you apply from Publication 946.

What triggers the mid-quarter convention instead of the half-year convention?

The mid-quarter convention is triggered when more than 40% of your total MACRS personal property placed in service during the year (measured by depreciable basis) is placed in service in the fourth quarter (October–December). When triggered, it applies to ALL personal property placed in service that year — not just Q4 purchases. The mid-quarter convention reduces year-1 deductions for property placed in service early in the year (because those assets get fewer 'months' of depreciation based on their actual quarter). To avoid triggering the mid-quarter convention, consider purchasing large assets in Q1–Q3, or use Section 179 or bonus depreciation to bypass the convention issue entirely.

What is depreciation recapture and when does it apply?

Depreciation recapture is the IRS mechanism for taxing a portion of your sale gain as ordinary income rather than capital gains — recovering the tax benefit of past depreciation deductions. For §1245 property (equipment, vehicles, machinery): when you sell the asset, the gain up to the total depreciation claimed is taxed as ordinary income. Example: you bought equipment for $20,000, depreciated it to $5,000 adjusted basis, and sold it for $18,000. The $13,000 gain includes $15,000 of depreciation taken; $13,000 is recaptured as ordinary income (the lesser of gain or accumulated depreciation). For §1250 property (buildings): post-1986 MACRS real property depreciates straight-line, so there is no 'additional depreciation' to recapture as ordinary income — but all accumulated straight-line depreciation is taxed at a maximum 25% rate as unrecaptured §1250 gain, rather than the long-term capital gains rate (0/15/20%).

How does a 1031 exchange affect depreciation?

A 1031 like-kind exchange defers recognition of gain — including depreciation recapture — when you exchange investment or business property for similar property through a qualified intermediary. The replacement property takes a carryover basis from the relinquished property (original cost minus accumulated depreciation), not the replacement property's fair market value. This means: (1) your depreciable basis on the new property is lower than its actual cost, producing smaller annual depreciation deductions going forward; (2) the deferred recapture is embedded in the replacement property's basis and will be recognized on the eventual taxable sale. A 1031 exchange is not permanent tax elimination — it is deferral. The exchange must use a qualified intermediary, identify replacement property within 45 days, and close within 180 days.

Can I depreciate land?

No. Land is not depreciable under any depreciation method. Only the cost attributable to structures (buildings, improvements) can be depreciated. For real property purchases, you must allocate the total purchase price between land and building to determine your depreciable basis. Common allocation methods: (1) County assessor's ratio — use the county tax assessment's land-to-total-value ratio applied to your purchase price; (2) Appraisal — a formal appraisal allocating land vs. improvement value; (3) Residual method — subtract estimated land value from total price. Over-allocating to land reduces your depreciable basis and your depreciation deductions; under-allocating (claiming too much to the building) overstates deductions and increases recapture exposure.

Provenance

Legal basis & official sources

Last verified 2026-05-08.

IRC §167 (Depreciation deduction — general authority). IRC §168 (Accelerated Cost Recovery System — MACRS rules, property classes, conventions, and methods). IRC §179 (First-year expensing election). IRC §168(k) (Bonus depreciation — TCJA phase-down schedule). IRC §1245 (Depreciation recapture — personal property; ordinary income on gain up to accumulated depreciation). IRC §1(h)(1)(D) (Unrecaptured §1250 gain — 25% maximum rate on accumulated straight-line depreciation on real property). IRC §1031 (Like-kind exchange — deferral of gain including recapture on qualified exchanges). Rev. Proc. 87-56 (MACRS asset class lives). IRS Publication 946 (How to Depreciate Property — comprehensive MACRS guidance and percentage tables). IRS Form 4562 instructions.

Direct filing portal: https://www.irs.gov/forms-pubs/about-form-4562

If you skip this

Leaving large deductions on the table — a $50,000 equipment purchase fully depreciated under MACRS 5-year class generates $10,000 in year-1 deductions without §179; over the 6-year recovery period, the full $50,000 is recovered; failing to claim these deductions overstates taxable income and overpays federal (and state) income tax each year
Missing the mid-quarter convention trap — placing significant assets in service in Q4 without checking the 40% test triggers the mid-quarter convention for all personal property acquired that year, reducing year-1 deductions for assets placed in service in Q1/Q2; proactively managing the timing of asset purchases can avoid this
Untracked depreciation recapture creating tax surprise at sale — sellers frequently underestimate recapture tax; failing to track cumulative depreciation on each asset means the recapture calculation at sale is inaccurate, often resulting in underpayment of tax on the sale year return
Not using a cost segregation study for real property — a $1M commercial building depreciated straight-line over 39 years yields $25,641/year in deductions; a cost segregation study reclassifying 30% to 5/7/15-year property can yield $150,000+ in first-year deductions; the study typically pays for itself in the first year
Ignoring 1031 exchange when selling appreciated real property — triggering depreciation recapture and capital gains on a direct sale of real estate (especially fully depreciated property) can result in 35–40% effective tax on the gain; a properly structured 1031 exchange defers this tax indefinitely while preserving equity for reinvestment

Official sources

§ A Related guides

§ B Building permits

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§ C Companion tools

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Disclaimer: Informational only, not legal or tax advice. Rules change, so confirm with a business attorney or CPA before you act.