How Many Years to Depreciate a Commercial Building? Key Tax Facts Explained

Evan Willoughby

If you’re thinking commercial real estate is all about location, you’re mostly right—but the real moneymaker is what you do with the property after buying it. Truth is, commercial buildings quietly work for you every year via something called depreciation. The catch? Federal rules set exactly how fast you can write off that value. Mess it up, and Uncle Sam comes knocking with a big tax bill. So, how many years does a commercial building actually depreciate? Let’s break this down in a way that makes sense—and might just save you some serious cash.

How Depreciation Works for Commercial Properties

Depreciation isn’t just an accounting trick. It’s a way for property owners to recover the cost of their investment over time. The IRS thinks buildings—and the stuff inside—wear out, get used up, or just go out of style. They let you write off a chunk of the cost each year as a tax deduction. Here’s where things get interesting: only the building itself is depreciated, not the land underneath. Land doesn’t “wear out” in the government's eyes, so you can’t depreciate dirt.

Under current IRS rules (specifically, the Modified Accelerated Cost Recovery System or MACRS), a commercial building gets depreciated over a straight-line schedule of 39 years. Every full year, you write off 1/39th of the building’s value as a tax deduction. If your office building cost $1.95 million (building only, not land), you get a deduction of $50,000 per year. The first year, things aren’t quite a full 12 months, but after that, the yearly deduction is the same—simple and predictable.

Quick fact: Before 1993, the depreciation period for a commercial property was just 31.5 years. Congress stretched it out to 39 years to slow down tax write-offs. Residential rental property, by contrast, still uses 27.5 years. If you own multifamily apartments, you get those deductions sooner, but commercial buildings like offices, warehouses, hotels, and retail stores are locked into the longer timeline.

This 39-year rule is mandatory—not optional—for just about every new commercial property put into service after May 13, 1993. The only exceptions are rare special-use cases, government property, or if you’re taking advantage of certain tax credits or incentives that might change the schedule. But for most folks in the real world, it’s thirty-nine years, no shortcuts.

If you buy an older property, you can only depreciate the value from when you first place it into service—what you paid for it, minus the value of the land. That means if you snag a bargain on a strip mall that’s seen better days, you don’t start depreciation from the day it was first built, but the moment you put it to use for your own business or rental income.

Breaking Down the Math: Deductions, Basis, and Useful Life

Numbers matter here. The IRS expects you to separate the cost of your building from the land—usually by getting a professional appraisal or using the property tax statement. For example, you buy a property for $2.5 million: if $500,000 is land, only $2 million is depreciable. That’s the commercial building depreciation basis.

Use this formula for calculating the annual deduction:

• Depreciable basis (building cost, minus land) / 39 years
• If partial year, use the mid-month convention: first and last years are pro-rated based on when placed in service or removed

Let’s see it in action. Say you put your $2 million building in service in August. You’ll only get four and a half months’ worth of depreciation for that first year. The second year, you get the full $51,282 ($2 million / 39 years), and so on. The IRS provides a big table of partial-year factors, but most tax software handles this for you.

Pro tip: Any improvements—like a new roof, updated HVAC, or energy-saving windows—can also be depreciated. Better yet, some items inside your building, like specialized equipment or smaller upgrades, can sometimes be deducted much faster (think five, seven, or fifteen years) if you get a cost segregation study. This report breaks down your purchase price and lets you speed up tax write-offs. It’s a game-changer for commercial investors.

Here's a breakdown of sample deduction amounts by property type:

Remember, if you sell before the 39-year mark, you have to “recapture” any depreciation you’ve taken. That means you’ll pay more taxes on your profit, but you’ve already enjoyed much lower bills each year along the way.

Exceptions, Cost Segregation, and Bonus Depreciation

The boring 39-year straight line isn’t the end of the story. Some parts of your commercial property can get supercharged tax treatment, letting you write off costs much faster through cost segregation studies or bonus depreciation rules. This isn’t just for big players—a strip-mall owner in Iowa used cost segregation and wrote off nearly 25% of their $1M purchase in just the first year. That’s thousands in tax savings up front, thousands more freed-up cash for improvements or new deals.

Cost segregation works by breaking your building purchase into parts with shorter “useful lives”: things like carpet, signage, parking lots, lighting, furniture, and even landscaping. These can be depreciated over 5, 7, or 15 years instead of 39. If you spent $300,000 on HVAC and parking lot lights, that chunk comes off your taxes really quickly versus trickling out over four decades.

From late 2017 until the start of 2023, bonus depreciation made things even rosier: you could deduct 100% of certain qualified improvements the very first year. For instance, replacing a $100,000 restaurant kitchen? Deduct it immediately. While that bonus percentage is now phasing out (80% in 2023, 60% in 2024, and so on), cost segregation alone still packs a punch and can deliver major up-front tax relief. Always check which rules are current each year, since Congress loves changing them.

What about those exceptions? If your property qualifies as “qualified improvement property”—think roofing, fire systems, or energy efficiency upgrades done after you buy a place—these usually fall under 15-year depreciation and may be eligible for bonus depreciation, depending on the tax year. And if you decide to demolish and build new, much of the old structure’s basis can be written off immediately. Talk about a silver lining for what seems like a loss.

There’s one more curveball: historic properties. If your building is listed on the National Register or located in a historic district, you might score a tax credit instead of (or in addition to) straight depreciation. The rules on these are strict but lucrative—sometimes up to 20% of renovation costs can be credited directly against your IRS bill. That’s on top of, not instead of, normal deductions.

Don't forget alternative depreciation schedules, either. If you rent to government or tax-exempt entities, you could be forced onto a slower schedule, meaning even longer than 39 years. Not common, but worth a heads-up.

Smart Strategies and Key Takeaways for Owners and Investors

So what should savvy property owners actually do with this info? Start by nailing down your building-versus-land split, as this forms the base for all your deductions. Use a professional appraisal if your numbers ever look fishy or if the IRS comes calling. Even better—plan improvements and renovations strategically. Certain upgrades might qualify for faster deductions or even bonus depreciation, especially if you time them before phaseouts hit.

If you’re investing with partners, depreciation gets divided according to your ownership percentage. But watch out for the “passive activity loss” rules: if you’re just a financer and not hands-on, your deductions might be capped until you earn active rental income. On the other hand, if you run the business from that building, you can usually get the full shot of deductions right away.

Thinking about flipping that building after a few years? Factor in depreciation recapture in your math. It’s taxed at 25%, not the lower long-term capital gains rates. No, it’s not fun—but the annual tax savings you got often more than makes up for it.

If your building changes hands between relatives, say through a trust or estate, depreciation resets to the new basis. It’s one reason why commercial property has been a popular way to pass wealth along to new generations. Long-term owners also tend to benefit from beating inflation, since your deduction is based on original cost, not future inflated values.

Last tip: always double-check which improvements can get special treatment. Since tax codes change every couple years, a good CPA or tax advisor becomes your best friend—seriously. Never just guess; get a pro opinion before starting major projects or buying new properties. Catching the right strategy can mean five or six figures in tax savings across just a few years.

Bottom line? The magic number for most commercial buildings is 39 years—universal, non-negotiable, with only a handful of exceptions. Yet, by getting smart about cost segregation or bonus depreciation, by knowing how to time your improvements, and by planning ownership splits and exit strategies, you can easily turn depreciation from a background accounting note into a real, cash-in-your-pocket advantage. Think of it as the ultimate real estate hack that quietly pays you back, year after year.