Commercial Property Depreciation: 39 Years and Mixed-Use Buildings

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: Nonresidential buildings are depreciated straight-line over 39 years using the mid-month convention. A mixed-use building is residential (27.5 years) only if at least 80% of gross rent comes from dwelling units. Interior improvements to commercial buildings may be qualified improvement property with a 15-year life, eligible for bonus depreciation and Section 179.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage; the IRS pays for the roof, eventually, over 27.5 years. Unless your tenant is a dentist, a coffee shop or a warehouse operator. Then the IRS pays for the roof over 39 years, which is roughly the time it takes a commercial lease negotiation to finish.

Commercial and mixed-use property follow the same basic depreciation system as residential rentals, the Modified Accelerated Cost Recovery System (MACRS), with a longer life and a few extra opportunities. Here is how it works as of October 2026.

CPA Warning Label: The 80% test is measured on rent, not square footage, and it can change from year to year as leases change.

80% residential test

A building is residential rental property only if 80% or more of its gross rental income for the year is rental income from dwelling units (IRS Publication 946). Otherwise, it is nonresidential real property. If you occupy part of the building yourself, the fair rental value of your own unit counts in the test as rental income from a dwelling unit.

Key details:

• It is a rent test, not a square-footage or unit-count test. A building with three apartments and one big-ticket retail tenant can fail it.
• Dwelling units are houses or apartments used to provide living accommodations. Units in hotels, motels and similar establishments where more than half the units are used on a transient basis do not count.
• It is applied each year. If a building flips from residential to nonresidential because a commercial lease rises, the recovery period can change going forward, which is a change in use under the regulations.

Illustration: A two-story building rents three apartments for $1,500 a month each ($54,000 a year) and a ground-floor shop for $2,000 a month ($24,000 a year). Total rent $78,000; dwelling rent is 69%. It fails the 80% test, so the entire building is 39-year nonresidential property. If the shop rent were $1,000 a month ($12,000 a year), dwelling rent would be 81.8% and the whole building would be 27.5-year residential.

39-year schedule

Nonresidential real property placed in service after May 12, 1993 is depreciated straight-line over 39 years with the mid-month convention: property placed in service in any month is treated as placed in service in the middle of that month (Publication 946). The first year's percentage depends on the month; January gets 11.5 months, December gets half a month. Full years are 1/39 of basis, about 2.564%.

Percentages are from the IRS MACRS table for 39-year nonresidential real property in Publication 946 (Table A-7a); they approximate 1/39 of basis times the months in service, counting the first month as half, divided by 12. Land is not depreciable; the purchase price must be allocated between land and building, often by the assessor ratio or an appraisal.

The building's structural components, such as walls, windows, plumbing, HVAC and roofs, are part of the 39-year building unless they are separately identified as something else through cost segregation.

Mixed-use allocation

For a building that fails the 80% test, everything in the building structure is 39-year property, including the apartments. There is no split between 27.5-year and 39-year portions of a single building under the rent test. What you can still separate:

• Land (not depreciable).
• Land improvements such as parking lots, sidewalks and landscaping (15-year property).
• Personal property such as appliances in the apartments or fixtures used by a business (generally 5- or 7-year).

If you live in part of the building, the personal-use portion is not depreciable at all, and expenses must be allocated between personal and rental use (Publication 527).

Because commercial buildings have longer lives, cost segregation is especially attractive: moving cost from 39 years to 5, 7 or 15 years accelerates deductions more than the same move from 27.5 years.

QIP for commercial

Qualified improvement property (QIP) is any improvement to an interior portion of a nonresidential building, made after the building was first placed in service, except improvements for the enlargement of the building, any elevator or escalator, or the internal structural framework (Publication 946). QIP has a 15-year recovery period and is eligible for bonus depreciation. As of October 2026, bonus depreciation is 100% for qualified property acquired after January 19, 2025 (IRS Notice 2026-11 and Form 4562 instructions).

QIP can also be expensed under Section 179, as can certain improvements to nonresidential real property: roofs, HVAC, fire protection and alarm systems, and security systems (IRS Topic 704). Section 179 is limited to taxable income from the active conduct of a trade or business, so a passive investor leasing out a building may not benefit. Section 179 generally does not apply to property used predominantly to furnish lodging, which is why it is mostly a commercial-property tool.

Only nonresidential buildings have QIP. Interior improvements to an apartment building are generally 27.5-year property unless they are personal property.

Example

Illustration: An investor buys a small office building in March 2026 for $1,200,000, allocating $240,000 to land. A cost segregation study identifies $96,000 of 15-year land improvements (parking lot, landscaping) and $48,000 of 5-year property (carpeting, specialty electrical). The remaining building basis is $816,000. In October 2026, the investor spends $150,000 on interior build-out for a new tenant, which qualifies as QIP. Assume all property was acquired after January 19, 2025 and 100% bonus is claimed.

Without the study or QIP, straight-line on $960,000 of building plus $150,000 of build-out over 39 years would have produced roughly $20,000 in 2026. The catch: the 2026 loss may be passive and suspended, and the bonus-depreciated land improvements and personal property face recapture on a taxable sale. State depreciation may differ if the state decouples from bonus.

Selling commercial property

When a commercial building is sold, straight-line depreciation on the building is unrecaptured Section 1250 gain taxed at a maximum 25% rate for individuals, and the remaining long-term gain is taxed at capital gains rates (IRS Topic 409). Components reclassified by cost segregation or expensed as QIP are a different story. QIP and land improvements are Section 1250 property, but if bonus or Section 179 was claimed, the excess of accelerated depreciation over straight-line can be recaptured as ordinary income under the Section 1250 rules for nonresidential property, and Section 1245 property is recaptured at ordinary rates in full to the extent of gain. Section 179 deductions on roofs, HVAC and similar items are treated as Section 1245 recapture.

Translation: front-loading deductions on commercial property speeds up the tax benefit but can convert some future capital gain into ordinary income. A 1031 exchange into other real property defers it, though personal property components may not be like-kind to real property and can create taxable boot.

Commercial-specific wrinkles

• Tenant improvements paid by the landlord are generally the landlord's property and depreciated by the landlord; when a tenant leaves and the improvements are abandoned or demolished, remaining basis can generally be written off.
• Lease incentives, including construction allowances paid to tenants, have their own rules, including Section 110 for certain short-term retail leases.
• Triple-net leases shift expenses to tenants, but the landlord still depreciates the building.
• Business interest limits under Section 163(j) may apply to larger owners; electing out as a real property trade or business requires using the alternative depreciation system, which lengthens nonresidential property to 40 years and makes QIP ineligible for bonus.
• Energy efficiency. The Section 179D deduction for energy-efficient commercial buildings is not allowed for property whose construction begins after June 30, 2026 (IRS OBBB energy FAQs).