Cost Recovery (MACRS)
Cost Recovery under the Modified Accelerated Cost Recovery System (MACRS) is the IRS-prescribed framework under IRC Section 168 for depreciating business and investment property, assigning assets to recovery periods ranging from 3 to 39 years and using accelerated declining-balance methods to front-load deductions and reduce the present value of a taxpayer's tax liability.
MACRS, established by the Tax Reform Act of 1986 and governed by IRC Section 168, is the mandatory depreciation system for most tangible property placed in service in the United States after 1986. It replaced the Accelerated Cost Recovery System (ACRS) and provides specific recovery periods, depreciation methods, and conventions for virtually every category of depreciable asset.
Assets are assigned to property classes based on their Asset Depreciation Range (ADR) class life or specific statutory classifications. Common classes include 5-year property (computers, cars used in business, certain manufacturing equipment), 7-year property (office furniture, most machinery and equipment — the default class if an asset has no other class life), 15-year property (land improvements, qualified improvement property under post-TCJA rules), and 27.5-year property (residential rental real estate) and 39-year property (nonresidential real estate).
For personal property (non-real-estate assets), MACRS uses the 200% declining balance method switching to straight-line when it produces a larger deduction — a system that concentrates depreciation deductions in the early years of an asset's life. Residential real estate uses straight-line depreciation over 27.5 years; commercial real estate uses straight-line over 39 years. Conventions determine how much depreciation is allowed in the first and last year of the recovery period: the half-year convention is standard for personal property, but a mid-quarter convention applies if more than 40% of personal property is placed in service in the fourth quarter.
Bonus depreciation under IRC Section 168(k) allows immediate expensing of qualifying new and used property. Under the Tax Cuts and Jobs Act of 2017, 100% bonus depreciation was available through 2022. It has been phasing down — 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 — before expiring under current law. Section 179 expensing provides an additional immediate deduction mechanism, subject to annual dollar limits and a taxable income limitation.
For real estate investors, MACRS depreciation is a powerful tool for generating paper losses that shelter cash flow. A rental property generating positive cash flow can simultaneously show a tax loss due to depreciation deductions. However, when the property is sold, accumulated depreciation creates recapture income taxed at up to 25% under the Section 1250 unrecaptured depreciation rules, an important consideration in exit planning.