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).
H.R. 2346 - Energy Efficient Qualified Improvement Property Act of 2021 or the E-QUIP Act
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The current law depreciation rules are out of date and do not reflect the actual economic life of structures.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?
More realistic recovery periods on buildings would make real estate a more attractive investment.
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 suggested 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).
While lengthening recovery periods for real property was considered in early debates over tax reform before the enactment of the Tax Cuts and Jobs Act of 2017, this concept did not make it into the final version of the bill that was enacted and depreciation for real estate remains much as it has been since 1987.
More recent discussion among policy makers about tax reform has largely been limited to debates over whether tax rates should be raised or not and little discussion has taken place about depreciation.
Federal Taxation Committee