If you’ve done much research into investing in rental real estate, you’ve probably come across the acronym MACRS – and may be wondering exactly what it means.
In this post, we’ll explain what the Modified Accelerated Cost Recovery System is, and how understanding MACRS helps rental property owners maximize available tax deductions.
Approved by the IRS
The Modified Accelerated Cost Recovery System (MACRS) is the IRS-authorized method for depreciating assets over time.
It’s a set of rules and classifications that determines how long the recovery period is for any given asset, and whether depreciation can be accelerated. These classes are determined based on the expected useful life of the asset.
Common classifications that relate to rental property owners
- 39-year depreciation period
- Commercial real estate
- 27.5-year depreciation period
- Residential rental property
- 15-year depreciation period
- Land improvements: driveways, parking lots, sidewalks, landscaping, fencing, trees & shrubs, swimming pools, decks, patios, outdoor lighting
- 7-year depreciation period
- Non-structural: office furniture and office equipment used in managing rental properties
- 5-year depreciation period
- Appliances featured at the rental property: refrigerators, stoves, dishwashers, washers & dryers
- Removable carpeting
- Blinds, shades, curtains
- Security systems (if separate from the structure)
- Property maintenance tools
- Vehicles used exclusively for managing rental properties
Straight line vs accelerated depreciation
While MACRS spreads depreciation out over time for both residential and commercial real estate, the system allows an accelerated depreciation structure for all other rental-related assets.
What this means is that you can write off a greater percentage of the value in the early years of an asset’s useful life. For most non-real estate assets, the 200% declining balance method is used.
Here’s an example of how it works.
Notice two things:
- In both cases, the total depreciated amount is the same – $10,000
- With the 200% Declining Balance Method, depreciation reverts to straight-line in the final year
Also, the IRS automatically defaults to the 200% declining balance method – but the taxpayer can choose to use straight-line depreciation if preferred. In the next section, we’ll explain why this is important.
Straight-line vs accelerated depreciation
Choosing between straight-line or accelerated depreciation depends entirely on your tax efficiency goals and financial situation.
You may prefer even deductions and choose straight-line depreciation when:
- You plan to hold the property long-term until it is fully depreciated
- Your income is low in the year you acquire the asset and you do not need large first-year deductions
- You expect your income to rise in future years
200% declining balance is better when:
- You need to lower taxable income now
- You plan to sell the asset before its useful life has been exhausted
- You expect your income to drop in future years
Bonus depreciation and Section 179 expensing
In some cases, landlords may choose to take advantage of bonus depreciation or Section 179 expensing in addition to MACRS depreciation to immediately deduct most (or all) of an asset’s cost in the first year instead of spreading it out over time.
- Bonus depreciation: Allows businesses and investors to deduct a larger portion of asset costs upfront, often used for appliances, furniture, or equipment.
- Section 179 expensing: Can sometimes be used by rental property investors for tangible personal property used in rental operations.
These accelerated options can help you reduce taxable income quickly but do eliminate your depreciation deduction in future years.
As a rental property owner, how does MACRS maximize my tax deductions?
Working together with your CPA, you can improve your tax efficiency by strategically timing when to purchase (or sell) certain assets required for your rental business, and choosing the right depreciation method to best offset your income in the short-, medium-, and long-term.
By pulling the right levers, you can maximize your depreciation deduction when you need it most to minimize your tax liability.
