717 / How is depreciation on property placed in service after 1986 calculated?
Generally, the Accelerated Cost Recovery System (ACRS) was modified for property placed in service after 1986. An election could be made to apply the post-1986 ACRS to property that was placed in service between July 31, 1986 and January 1, 1987 (unless such property would have been subject to the anti-churning rules if it had been placed in service after 1986).1 If real property is acquired before 1987 and converted from personal use to a depreciable use after 1986, the post-1986 ACRS is to be used.2
The post-1986 ACRS deduction is calculated by applying to the basis of the property either (1) a declining balance method that switches to the straight line method at a time which maximizes the deduction or (2) a straight line method.3 The initial basis in the property is the basis of the property upon acquisition (usually the cost of the property, see Q 692), reduced by the amount, if any, elected for amortization or an IRC Section 179 deduction (see Q 725), and further reduced by any basis reduction required in connection with taking the investment tax credit (see Q 7893).4 The basis of the property is reduced each year by the amount of the depreciation allowable.5 Optional depreciation tables set out in Revenue Procedure 87-57 may be used in place of the methods above.6 Because land cannot be depreciated, the cost basis of improved land must be allocated between the land and improvements.7 The ACRS deduction is limited in the case of certain automobiles and other “listed property” placed in service after June 18, 1984. See “Limitations,” ( Q 726).
The classification of property by recovery period and depreciation method is as follows:8
| 3 years 200% DB* | class life of 4 years or less, certain horses, qualified rent-to-own property |
| 5 years 200% DB* | class life of more than 4 but less than 10 (e.g., heavy trucks, buses, offshore drilling equipment, most computer and data handling equipment, cattle, helicopters and non-commercial aircraft, automobiles and light trucks) |
| 7 years 200% DB* | class life of 10 or more but less than 16 (e.g., most office furnishings, most agricultural machinery and equipment, theme park structures, most railroad machinery, equipment and track, commercial aircraft), motorsports entertainment complexes, Alaska neutral gas pipelines, property without a class life and not otherwise classified under TRA ‘86 |
| 10 years 200% DB* | class life of 16 or more but less than 20 (e.g., vessels, barges and similar water transportation equipment, petroleum refining equipment) |
| 15 years 150% DB* | class life of 20 or more but less than 25 (e.g., industrial steam and electric generation/distribution systems, cement manufacturing equipment, commercial water transportation equipment (freight or passenger), nuclear power production plants) |
| 20 years 150% DB* | class life of 25 or more (e.g., certain farm buildings, railroad structures and improvements, telephone central office buildings, gas utility production plants and distribution facilities), but excluding real property with class life of 27.5 years or more |
| 27.5 years straight line | residential rental property |
| 39 years straight line | nonresidential real property (class life of 27.5 years or more) |
| 50 years straight line | railroad grading or tunnel bore |
| * Declining balance method switching to the straight line method at a time to maximize the deduction. Substitute 150 percent DB for 200% DB if 3-, 5-, 7-, or 10-year property is used in a farming business. An election can be made to use the straight line method instead of the declining balance method. Also, with respect to 3-, 5-, 7-, and 10-year property, an election can be made to use 150 percent DB. | |