Depreciation

Depreciation

Independent studies indicate that the economic life of real property ranges between 18 and 30 years. Economic depreciation is more than just physical wear and tear, but also includes adjustments to the value of real property caused by changes in tastes, new technology, and by improvements in the quality of new assets relative to old assets (known as obsolescence).

Politicial Advocacy

Current Legislation/Regulation

None at this time.


In-Depth

Find NAR's letters, testimonies, bill updates, and more on the NAR Federal Issues Tracker


Legislative Contact(s):

Evan Liddiard
eliddiard@realtors.org
202-383-1083

Jamie Gregory
jgregory@realtors.org
202-383-1027

Erin Stackley
estackley@realtors.org
202-383-1150

Regulatory Contact(s):

Evan Liddiard
eliddiard@realtors.org
202-383-1083

What is the fundamental issue?

The current law depreciation rules are out of date and do not reflect the actual economic life of structures.  The 27.5- and 39-year cost recovery periods for real property should be shortened.

I am a real estate professional. What does this mean for my business?

A more realistic rate of return on depreciable assets would make real estate a more attractive investment.

NAR Policy:

NAR supports a depreciable life for real estate that accurately reflects the economic life of the property.  A 2001 NAR Working Group determined that a more realistic life would be about 22 to 24 years.

More recently, a 2015 study by the MIT Center for Real Estate concluded that both nonresidential and residential properties net of land depreciate at about 7 percent per year on average.  This is significantly faster than previous estimates.  In analyzing the MIT study, PricewaterhouseCoopers (PwC) equated the annual depreciable life suggest by the study to be about 20 years for nonresidential property, and about 19 years for residential property.  

It is important to note that economic depreciation is more than just physical wear and tear, but also includes adjustments to the value of real property caused by changes in tastes, new technology, and by improvements in the quality of new assets relative to old assets (known as obsolescence).

Legislative/Regulatory Status/Outlook

While longer recovery periods for real property was a key part of the proposed Tax Reform Act of 2014, which was introduced by then-House Ways and Means Committee Chairman Dave Camp (R-MI), who has since retired, more recent tax reform plans have abandoned the idea of lengthening depreciation schedules.  Instead, the latest concept from House Republicans is the idea of allowing new productive assets, whether personal or real property, to be immediately deducted in the year they are placed in service.  This would not apply to land, which would remain non-depreciable.  This so-called "immediate expensing" is a drastic change in policy from the 2014 proposal, and has been met with a mixture of enthusiasm and skepticism.  Many in the commercial real estate community are concerned about how such a proposal would work, and if it would lead to overbuilding.  

However, the concept is not yet detailed enough to provide specifics of how such a change might affect the real estate markets.

NAR Committee:

Federal Taxation Committee

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