Depreciating Additions and Improvements

An addition or improvement you make to depreciable property is treated as separate depreciable property.

Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service.

The recovery period begins on the later of the following dates:

  • The date you place the addition or improvement in service.
  • The date you place in service the property to which you made the addition or improvement.

If the improvement you make is qualified leasehold improvement property or qualified restaurant property, the GDS recovery period is 15 years (39 years under ADS).

Example.

  • You own a rental home that you have been renting out since 1981.
  • If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition.
  • Under GDS, the property class for the addition is residential rental property and its recovery period is 27.5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year.

After October 22, 2004:

Qualified improvements placed in service after October 22, 2004 must be depreciated using the straight-line method over a 15-year recovery period.

Qualified improvement are improvements to an interior portion of a nonresidential building, provided:

  • The improvement is made under a lease either by the lessee (or sublessee) or by the lessor of that portion of the building to be occupied exclusively by the lessee (or sublessee);
  • The improvement is placed in service more than three years after the date the building was first placed in service; and
  • The improvement is not attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common area, or the internal structural framework of the building.

After May 12, 1993:

Depreciate an addition or improvement to nonresidential real property placed in service after May 12, 1993 over 39 years using straight-line depreciation (MACRS real estate rates).

Start depreciation in the month the addition or improvement is placed in service.

File your personal and small business taxes (Schedule C)