Federal Tax / Depreciation of Real Property

The current law depreciation rules are out of date and do not reflect the actual economic life of structures.  The 27.5- and 39-year cost recovery periods for real property should be shortened.

A more realistic rate of return on depreciable assets would make real estate a more attractive investment.

NAR supports a depreciable life for real estate that accurately reflects the economic life of the property.  A 2001 NAR Working Group determined that a more realistic life would be about 22 to 24 years.

More recently, a 2015 study by the MIT Center for Real Estate concluded that both nonresidential and residential properties net of land depreciate at about 7 percent per year on average.  This is significantly faster than previous estimates.  In analyzing the MIT study, PricewaterhouseCoopers (PwC) equated the annual depreciable life suggest by the study to be about 20 years for nonresidential property, and about 19 years for residential property.  

It is important to note that economic depreciation is more than just physical wear and tear, but also includes adjustments to the value of real property caused by changes in tastes, new technology, and by improvements in the quality of new assets relative to old assets (known as obsolescence).

Opponents of NAR policy will generally be looking at maintaining or lengthening the depreciable period for real property for purposes of raising revenue that can be used to pay for other changes in the tax law, such as lowering tax rates.