By Tenant Advisory Group · Updated
Short answer
IRS Publication 946 gives nonresidential real property, such as an office building, store or warehouse, a 39-year recovery period under the General Depreciation System, using the straight line method and the mid-month convention. Land cannot be depreciated, so the purchase price must be split between land and building. Some improvements and components may recover faster. Your CPA should set the allocation and method.
What depreciation is, in one paragraph
As a tenant, your company deducts rent as it pays it. As an owner, it generally cannot deduct the cost of the building in one year. IRS Topic 704 says you generally must depreciate a capital expenditure, recovering the cost over a number of years with a deduction each year until the cost is recovered. The deduction does not match any cash going out that year, which is why owners watch it when comparing owning with leasing.
For the property to qualify, the IRS lists these requirements: you must own it, use it in a business or income-producing activity, it must have a determinable useful life and be expected to last more than one year, and it must not be excepted property. For an owner-user building, the first question is usually which company owns it, since that is the company that claims the deduction. If your building sits in a separate company, your CPA will address that as part of the structure.
Everything below reflects IRS Publication 946 for use in preparing 2025 returns. Tax rules can change, so confirm them with your CPA for the year you place the building in service.
The 39-year rule for your building
Publication 946 defines nonresidential real property as section 1250 property, such as an office building, store or warehouse, that is neither residential rental property nor property with a class life of less than 27.5 years. Its table of recovery periods under the General Depreciation System lists nonresidential real property at 39 years. The publication also describes an elective Alternative Depreciation System, and required ADS in some situations, so ask your CPA whether either affects you.
The mid-month convention sets the start and end. The publication says to treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of that month, allowing one-half month of depreciation for the month.
The IRS's own example shows how it works. A building bought and placed in service in January for $100,000, nonresidential with a 39-year recovery period, using GDS, straight line and the mid-month convention, has a straight line rate of 1 divided by 39, or 0.02564. A full year of depreciation is $2,564. With 11.5 months in the first year, first-year depreciation is $2,456.
The clock starts when the building is placed in service, which Publication 946 defines as ready and available for a specific use, even if you are not using it yet. Tell your CPA the closing date and when the building was ready for your use.
Land does not depreciate, so the split matters
Publication 946 is direct: you cannot depreciate the cost of land because land does not wear out, become obsolete or get used up. That cost generally includes clearing, grading, planting and landscaping. Some land preparation costs that are closely associated with depreciable property can be depreciated. In the IRS example, bushes planted next to a new building that would be destroyed if the building were replaced can be depreciated, while plantings around the outer border of the lot cannot.
So a lump-sum price has to be divided. IRS Publication 551 says that if you buy buildings and the land they stand on for a lump sum, you allocate the basis among them, multiplying the lump sum by a fraction: the fair market value of that asset over the fair market value of the whole property at the time of purchase. If you are not certain of the fair market values, it says you can allocate based on assessed values for real estate tax purposes.
This is where a purchase price turns into a tax result. Consider a hypothetical, for illustration only: a $2,000,000 purchase in which $1,600,000 is allocated to the building and $400,000 to the land. Only the $1,600,000 enters the 39-year calculation, for about $41,026 of full-year depreciation. A different allocation changes the deduction every year. Ask your CPA what support to keep, such as the appraisal your lender orders.
What can recover faster than 39 years
Not everything you buy or build is the 39-year building. These categories are worth raising with your CPA:
- Land improvements. Publication 946 lists certain improvements made directly to land or added to it, such as shrubbery, fences, roads, sidewalks and bridges, as 15-year property.
- Qualified improvement property. Generally, an improvement to an interior part of a nonresidential building, made by you and placed in service after the building was first placed in service, excluding enlargement, elevators or escalators, and internal structural framework. It is listed as 15-year property when placed in service after 2017.
- Equipment and other personal property. Items that are separate from the building generally have shorter periods, and a cost segregation study is the common way to identify them in a purchase.
- Section 179. Topic 704 says you may elect to treat qualified real property as qualifying property under Section 179, including qualified improvement property and certain roofs, HVAC, fire protection, alarm and security improvements made after the building was first placed in service. Limits apply, and they change.
- Special depreciation allowance. Publication 946 says that, unless you elect out, you must take a 100% allowance for certain qualified property acquired and placed in service after January 19, 2025, including tangible property with a recovery period of 20 years or less. The 39-year building itself does not fit that description.
If you plan a build-out soon after closing, these rules can affect how you scope and invoice the work. Have your CPA see the plan before construction starts.
The other side: selling later
Depreciation lowers your basis, and that returns at sale. IRS Publication 544 defines unrecaptured section 1250 gain as generally the part of any long-term capital gain on real property that is due to depreciation, and its depreciation recapture rules can treat part of a gain on depreciable property as ordinary income. A faster deduction today can raise the tax on that later gain, so the choice is about timing as well as amount. Ask your CPA to model both.
If you plan to defer that gain through a 1031 exchange, Publication 946 notes that property received in a nontaxable exchange generally takes a carryover basis, and special depreciation rules apply. Bring that up before you plan on full depreciation for the new building.
What to bring to your CPA
Tenant Advisory Group helps buyers compare the cost of owning with leasing, and we use your CPA's depreciation estimate in that comparison. We do not provide the tax estimate itself. These are the items that make the conversation productive.
- Which entity will hold title and claim depreciation?
- What does the closing statement show, and which closing costs are added to basis?
- How will we allocate the price between land and building, and what will support it?
- When is the building ready and available for our use?
- Is part of the building leased to others, or used by another company we own?
- Are we planning improvements, and how will those costs be classified?
- Is a cost segregation study worth its cost at our price and holding period?
- How does the depreciation plan affect tax on a future sale or exchange?
Frequently asked questions
How long do you depreciate a commercial building?
IRS Publication 946 lists nonresidential real property at 39 years under the General Depreciation System, with the mid-month convention. Confirm the current rule and your facts with your CPA.
Can I depreciate the land?
No. The IRS says land does not wear out, become obsolete or get used up. You allocate the purchase price between land and building, and only the building portion goes on the depreciation schedule.
Does the 100% special depreciation allowance apply to my building?
Not to the 39-year building as such. Publication 946 describes it for qualified property such as tangible property with a recovery period of 20 years or less. A separate election exists for qualified production property, so ask your CPA whether your facts fit.
Is depreciation a cash cost?
No. It is a tax deduction that does not match cash paid that year. It can reduce taxable income now, but it reduces your basis, so it can affect the tax due when you sell.
Sources
This guide is general information, not legal, tax, lending or accounting advice. Have your attorney, CPA and lender review any purchase before you commit to it.