Taxes Tax Planning What Is Depreciable Property? By Beverly Bird Updated on November 22, 2022 Reviewed by Lea D. Uradu Fact checked by Sarah Fisher Fact checked by Sarah Fisher Sarah Fisher is an associate editor at The Balance with two years of personal finance and business writing experience. She has written about personal finance for SmartAsset, and has held internships at the Consumer Financial Protection Bureau and Senator Kirsten Gillibrand's office. learn about our editorial policies In This Article View All In This Article How Depreciable Property Works Definition & Example of Depreciable Property Methods of Depreciating Property Property That Isn’t Depreciable When You Have To Pay Taxes on Depreciable Property Frequently Asked Questions (FAQs) Photo: Xavierarnau / Getty Images Definition Depreciable property is property you buy to help you make money, such as with your business. This property will eventually become less valuable or even obsolete over time. Key Takeaways Depreciable property is that which is purchased with the intention that it will help you make money. It doesn’t include property used solely for personal reasons.The Internal Revenue Code allows you to claim a tax deduction for the cost of the asset.Depending on the nature of the asset, you can divide the cost of the property over several years, referred to as its “class life,” or you can fast-track the deduction in some cases and claim it in the year of purchase.Depreciation is a highly complicated area of tax law and is subject to some limitations, so you might want to enlist the help of a professional before you claim it. How Depreciable Property Works Depreciable property is property you buy to help you make money, such as with your business. The Internal Revenue Code (IRC) allows you to deduct from your taxable income the expense of purchasing this kind of business-related asset. Because you can’t always deduct the entire cost of an asset in the year you buy it, you may need to depreciate some property and deduct a portion of the cost over several years. Note You can depreciate personal property that you use for both personal and business reasons, but you can only deduct a percentage of the cost equal to the percentage of time it’s used for business reasons. The property must have an anticipated usable lifespan of more than one year. This rules out purchases such as inventory. It also rules out any asset that might be expected to remain serviceable forever. Its usable life must be determinable. You must be the owner of the asset. Depreciable assets include machinery, equipment, buildings, vehicles, and furniture. Example of Depreciable Property You might own and operate a cab company and you purchase a car for your fleet. It costs you $30,000. You can claim a portion of that $30,000 over five years—the depreciation time span or “class life” that the IRS assigns to vehicles. This works out to a depreciation deduction of $6,000 a year. Note The IRS provides a class life list of numerous types of property in Publication 946. The depreciation process ends at the conclusion of the asset’s class life, when you sell it, or if it simply wears out or otherwise fails in some respect before its class life has run down. It would also end if you stopped using the asset for income-earning purposes and began using it solely for personal reasons, such as if you retired that $30,000 vehicle from your cab fleet to drive it yourself. Note Depreciable property can also include the cost of any improvements you make to an asset, which is not to be confused with maintenance or repairs. Improvements count as a separate depreciation deduction. Repairs can also be deductible but as a business expense. Methods of Depreciating Property Most property can be depreciated using one of two methods, depending on its nature: straight-line depreciation or accelerated depreciation. As the term implies, accelerated depreciation provides the greatest tax deduction for an asset in the earlier year or years of its class life. Straight-line depreciation is the cost divided equally over the number of years of its class life. In either case, the depreciation process begins in the year in which you place the asset in service. Placing it in service does not have to mean that you're actually using it. It just needs to be available to use for business purposes. Straight-Line Depreciation Your depreciation deduction isn’t simply a matter of what you paid for that asset divided by its class life. It’s a more complicated mathematical equation. You must know the adjusted basis of the property and its salvage value. The salvage value is subtracted from the adjusted basis, then the resulting figure is the amount of your depreciation deduction. You’ll then divide this figure over the number of years of its class life. Your adjusted basis is typically what you paid for the property plus costs incurred in purchasing it, such as sales tax, installation fees, freight charges, or any other additional fees or charges. Note You must prorate the first year if you don’t use the property for the full 12 months of its year of purchase, such as if you buy it in August. IRS Form 4562 can help you make the correct calculation. You must submit the form with your tax return. The Section 179 Deduction The IRC provides for a special provision for accelerated depreciation: the Section 179 deduction. It allows you to claim all or most of the adjusted basis of an asset in the year of purchase if you place it in service that same year. Your depreciation deduction can be no greater than your taxable business income for the year. In other words, it can’t result in a tax refund. The most it can do is reduce or erase your taxable income. But you can carry over any balance remaining to the next tax year. Note The Section 179 deduction is capped at a maximum each year, but the limit is generous: $1.08 million for the 2022 tax year, the tax return you'll file in 2023. There’s also a special cap for sport utility vehicles, set at $27,000 for tax year 2022. Some restrictions apply to the types of property that can be depreciated this way, so check with a tax professional before moving ahead with claiming it. You may be able to qualify for the deduction if the property in question is tangible personal property, other tangible property, agricultural property, a research or storage facility, qualified real property, or some computer software. You must complete and submit Form 4562 with your tax return if you elect to use this method, if you carry over any portion of your depreciation deduction to the next tax year, or if you opt to take this deduction for a vehicle. Property That Isn’t Depreciable The key factor here is that depreciation is limited to property that will lose its value over time. An asset isn't depreciable if it can conceivably gain in value. This would include certain collectibles and investments such as stocks and bonds. Land isn't depreciable, although buildings erected on it or improvements made to it might be. Any property you use exclusively for personal reasons is not depreciable. The asset has to help you make money. Inventory isn’t depreciable because you hold it with the intention of selling it to customers. You can’t depreciate property that’s placed in service and retired or sold within the same year. Note You can claim depreciation associated with a home office or workspace if you own your home, but you must prorate the deduction based on the percentage of square footage that your work area takes up. When You Have To Pay Taxes on Depreciable Property It’s possible that you may have to “recapture” depreciation you've claimed under some circumstances. You would have to include it in your income for tax purposes in a future year. This would be the case if you stop using an item of depreciable property for business purposes at least 51% of the time. Depreciation you'd already claimed would be taxed along with your other sources of ordinary income, in this case, in the year the change occurred. This can also affect what you might pay in capital gains tax if you sell the asset for a profit. You must add back in the depreciation you claimed to your adjusted basis in the asset when calculating your profit for tax purposes. Frequently Asked Questions (FAQs) How do you calculate depreciation on property? You can calculate depreciation by first determining the cost of the property minus any applicable deductions. Then, you'll use the IRS modified accelerated cost system (MACRS) to determine what percentage of the value of your property you can deduct in a given year. What type of property cannot be depreciated? You cannot depreciate personal property. If you have personal property that you also use for business purposes, you can depreciate the business use portion. The property you are depreciating must last for at least one year. Land and other property that cannot be used up or become obsolete also cannot be depreciated. Other types of property that cannot be depreciated include equipment used for capital improvements and section 197 intangibles. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Internal Revenue Service. "Topic No. 704 Depreciation.” Internal Revenue Service. "Publication 946 (2021), How To Depreciate Property." Corporate Finance Institute. "Straight Line Depreciation."