Illustrative Warehouse
A hypothetical dry warehouse with racking and a truck court, showing how little of a simple box is short-life property. Educational information, not tax advice.
Educational information, not tax advice.
Updated 2026-10-14
Assumptions
- Educational information, not tax advice.
- Assume the building is used for storage, not manufacturing. Section 168(n) is not claimed.
- Assume racks were included in the purchase price. Title follows the contract.
- Assume the purchase file is read for a written allocation. Peco Foods is a risk if a §1060 writing exists; it is not assumed to apply to every warehouse purchase.
- Any dollar figures below are invented for arithmetic only. They are not a typical mix and not a client result.
Key takeaways
- A dry box is mostly 39-year property plus 15-year paving. That is an order-of-operations statement, not a claimed percentage.
- Racks and forklifts are personal property if the owner bought them. A rack-supported building is a different case (L.L. Bean).
- Section 168(n) does not apply to mere storage. Notice 2026-16 excludes storage, offices, and parking from qualified production property.
- If a purchase agreement allocated a lump sum to “warehouse and equipment,” read Peco Foods before subdividing.
A 120,000-square-foot dry warehouse is purchased with racks included in the price. The study’s job is to isolate the racks and dock levelers from the shell, and the truck court from the building. Suppose, for arithmetic only, a $9 million purchase with $1.8 million assigned to land. Invented depreciable basis is $7.2 million. This page does not claim how much of that pool is racks.
Notice 2026-16 excludes storage, offices, and parking from qualified production property. This illustration does not claim a 100% building write-off. Cost segregation classifies components under §168. Section 168(n) is a separate elective allowance for a qualifying production building portion — an election to discuss with a CPA, not a conclusion for this warehouse.
Order of operations: land, 39-year building, 15-year truck court, personal-property racks and dock equipment the owner actually bought, inspection, reconciliation, CPA filing. There is no IRS warehouse matrix. Rev. Rul. 2003-81 reminds reviewers to use both asset classes and activity classes.
Allocation
If a purchase agreement already allocated a lump sum to “warehouse and equipment,” Peco Foods is the warning to read that agreement before subdividing. A written §1060 allocation can bind the buyer. The ATG says it is unclear whether that holding extends beyond §1060 acquisitions. Do not state that Peco applies to every warehouse closing, and do not ignore a writing that is in the file.
Racks invoiced to the seller’s personal-property line should be tied to that line. Racks that are part of an undifferentiated building price are estimated from quantities and a cited cost source, then reconciled. Do not double-count.
Shell versus handling equipment
The building, including typical dock-high floors, roof, restrooms, fire sprinklers that protect the building, and general lighting, is nonresidential real property. Dock doors and dock lighting have been treated as structural in some freight-facility cases; present those outcomes as fact-specific. Levelers, restraints, and forklifts the owner bought are usual personal-property candidates.
Storage racks that are not the building are generally personal property. L.L. Bean, Inc. v. Commissioner involved a rack-supported warehouse structure treated as §1250; theoretical movability was not conclusive. This illustration assumes free-standing racks inside a conventional box, not a rack-supported building. If the facts look like L.L. Bean, stop and get a professional review.
Site work
The truck court, drive lanes, and trailer parking are usual 15-year land-improvement candidates (class 00.3). Buildings and structural components are excluded from that class. A parking structure would be a building. Yard lighting is analyzed on function. Fencing and gates are typical 15-year items. None of this is a paving percentage of the invented $7.2 million.
Site preparation and general grading are generally non-depreciable land. The audit guide tells examiners to allocate land preparation among land, building, and depreciable land improvements, and notes that before-and-after photographs help. A purchased used warehouse rarely has those photos; the report should say what was available.
Electrical and process claims
Do not assume every extra ampere of lighting is 5-year property. High-bay lighting that is the building’s general illumination stays with the building. Dedicated process power would require equipment and load evidence. Scott Paper allocated mill electrical by function; the ATG limits IRS-accepted functional allocation to primary and secondary electrical distribution. This dry box has no process line in the assumed facts.
Cold storage, freezer buildings, and fulfillment conveyors are different facts. They are not smuggled into this dry-warehouse illustration.
§168(n), inspection, and filing
A warehouse used only for storage is not a qualified production activity. Notice 2026-16 excludes storage, offices, and parking. This page does not elect §168(n) and does not decide eligibility for any reader. If a future owner begins manufacturing in part of the box, that is a different year and a CPA discussion, including recapture if use changes.
Inspect rack type, whether they are bolted only to the slab, dock equipment, and paving. Reconcile to depreciable basis. The ATG recommends a field inspection for all quality studies and ranks rule-of-thumb percentages last. Do not plug a dry-box study with a “warehouse personal-property average.” Used-property bonus on racks, if any, follows Notice 2026-11. The CPA files Form 4562. Educational information, not tax advice.
Sources
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- 6IRS Publication 946 — How To Depreciate Property (2025)(opens in a new tab)
Appendix B reproduces the Rev. Proc. 87-56 class lives.
- 7IRS Publication 5653 — Cost Segregation Audit Techniques Guide (rev. 2-2025)(opens in a new tab)
Written for IRS examiners. The guide states it is not an official pronouncement of law and cannot be cited as authority. It predates the July 2025 law.
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