Internal Revenue Code §168 — MACRS
Section 168 sets the Modified Accelerated Cost Recovery System: the methods, recovery periods, conventions, and the alternative system that govern most depreciation of tangible property placed in service after 1986. Cost segregation uses that grid; it does not rewrite it.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- §168(a): depreciation is set by the applicable method, recovery period, and convention.
- Default method is 200% declining balance switching to straight line; 15- and 20-year property use 150%; buildings and QIP use straight line.
- §168(e) assigns property to classes by class life, with statutory classes for buildings and some improvements.
- §168(g) (ADS) applies longer, straight-line periods in specified cases, including certain electing real-property trades or businesses.
- §168(k) and §168(n) are first-year additions; they do not change the class of the building itself.
Section 168 is the operating rule for depreciation of most tangible property. Subsection (a) says the §167(a) deduction is determined by three items: the applicable depreciation method, the applicable recovery period, and the applicable convention. Salvage value is treated as zero.
Subsection (b) sets methods. The default is the 200 percent declining-balance method, switching to straight line in the first year that straight line on remaining basis produces a larger allowance. Fifteen-year and 20-year property use 150 percent declining balance. Straight line is required for nonresidential real property, residential rental property, railroad grading or tunnel bore, water utility property described in §168(e)(5), and qualified improvement property described in §168(e)(6). A taxpayer may elect 150 percent or straight line by class for a year; once made, the election is irrevocable for that class and year.
Subsection (c) lists recovery periods: 3, 5, 7, 10, 15, and 20 years for the general classes; 25 years for water utility property; 27.5 years for residential rental property; 39 years for nonresidential real property; and 50 years for railroad grading or tunnel bore. Subsection (d) sets the conventions: half-year as the default, mid-month for those real-property categories, and mid-quarter when more than 40 percent of the aggregate bases of property (other than that real property) placed in service during the year is placed in service in the last three months.
Subsection (e) maps class lives to classes — for example, a class life of more than 4 and less than 10 years is 5-year property; 20 or more but less than 25 years is 15-year property. Property with no class life that is not otherwise classified is 7-year property. Subsection (e) also defines residential rental property (the 80 percent dwelling-unit test), nonresidential real property, and qualified improvement property.
This page is educational information, not tax advice. Classification of a specific asset is a fact-and-law question for the taxpayer’s CPA. Super Intelligence, as CostSeg SI describes it, is a proposed way to organize those facts — not an operational claim that any agent has classified a building.
The alternative depreciation system
Section 168(g) requires ADS for certain property, including property used predominantly outside the United States, tax-exempt use property, tax-exempt bond-financed property, property for which the taxpayer elects ADS, and property described in §168(g)(8). ADS uses straight line, the applicable convention, and longer recovery periods.
ADS periods include 40 years for nonresidential real property, 30 years for residential rental property, 12 years for personal property with no class life, and 40 years for §1245 real property with no class life. Qualified improvement property has a 20-year ADS class life under the special table in §168(g)(3)(B). Publication 946 states that the 30-year residential-rental ADS period applies to property placed in service after 2017.
Section 168(g)(8) applies ADS to the nonresidential real property, residential rental property, and qualified improvement property of a real property trade or business that elects out of the §163(j) interest limit. Property required to use ADS is not eligible for bonus depreciation under §168(k)(2)(D). A voluntary ADS election is made by class, or property-by-property for real property, and is irrevocable.
Bonus depreciation and qualified production property
Section 168(k) provides the additional first-year allowance for qualified property. As of October 16, 2026, that allowance is 100 percent for qualified property acquired after January 19, 2025, under Public Law 119-21 and Notice 2026-11. Property acquired earlier stays on the prior phase-down. Those rates belong on the bonus-depreciation pages.
Section 168(n), added by Public Law 119-21 in July 2025, provides an elective 100 percent allowance for qualified production property — a defined portion of nonresidential real property used as an integral part of a qualifying manufacturing, production, or refining activity. The allowance is temporary, elective, and subject to interim Notice 2026-16. This page does not decide whether any reader’s building qualifies.
Both allowances add to the §167(a) deduction. They do not reclassify a 39-year building as 5-year property. A manufacturing project can raise both a cost-segregation classification question and a separate §168(n) election question. Those are different analyses.
How cost segregation relies on §168
Section 168 assigns periods to classes, but it does not list every building component. Whether an item is a structural component (part of the 27.5- or 39-year building) or personal property in a shorter class is decided under the regulations and case law, especially Treas. Reg. §1.48-1 and Hospital Corporation of America v. Commissioner.
Class lives for many assets come from Rev. Proc. 87-56, reproduced in Publication 946, Appendix B. Asset classes 00.11 through 00.4 apply in all businesses. Activity classes apply to particular trades. An item described in both generally goes in the asset class unless it is specifically excluded from it or specifically included in the activity class.
A study that merely restates the statutory periods without applying those classification rules is not applying §168. The statute supplies the grid. The facts and the regulations place each component on the grid.
Residential and nonresidential buildings
Residential rental property is a building or structure if 80 percent or more of the gross rental income for the year is rental income from dwelling units. A dwelling unit is a house or apartment used to provide living accommodations, but not a unit in a hotel, motel, or other establishment more than one-half of whose units are used on a transient basis. If the taxpayer occupies part of the building, the rental value of that part counts in the test.
Nonresidential real property is §1250 property that is not residential rental property and does not have a class life of less than 27.5 years. Offices, stores, warehouses, and hotels generally fall here. The recovery period is 39 years, straight line, mid-month.
Those two building classes are the starting point for a study, not the end. Personal property and land improvements can still have shorter lives when the facts and the regulations support that treatment. The building class itself does not change because a report lists many lines.
Sources
- 1
- 2IRS Publication 946 — How To Depreciate Property (2025)(opens in a new tab)
Appendix B reproduces the Rev. Proc. 87-56 class lives.
- 3Public Law 119-21 (July 4, 2025), §§70301, 70306, 70307(opens in a new tab)
The 2025 reconciliation law, which the IRS describes as commonly known as the One, Big, Beautiful Bill Act.
- 4