Recovery Property

What Is a Recovery Property?

A recovery property was a specific class of depreciable real estate under the Accelerated Cost Recovery System (ACRS), a U.S. federal tax break from 1980 to 1986. In 1986, the ACRS became the Modified Accelerated Cost Recovery System (MACRS).

Any property that is depreciable under ACRS is considered recovery property, as long as it was put in service between 1980 and 1987. It can include new, used, real, or personal property that was used for trade, business, or helped produce income.

Understanding Recovery Property

Recovery Property is a designation of depreciable property which was in use during the ACRS. In 1986, the ACRS became the Modified Accelerated Cost Recovery System. Though recovery property is no longer a specific designation, nor is it the terminology used in the MACRS, you may still benefit from physical property that will depreciate over time.

The MACRS, the current tax depreciation system, was put into place as part of the Tax Reform Act of 1986. Under the current system, the cost basis of specific categories of property may be recovered over a particular amount of time. This timeframe is the life of an asset with a depreciation deduction taken each year until the end of the asset’s life.  

The IRS determines the life of an asset by classes, dividing tangible assets by type or by the business in which one uses them. The class or category has three levels of time-life. These are regular depreciation, alternative depreciation, and a property class life. 

In many cases, the taxpayer may choose which of the three levels to apply to their asset. However, depending on the asset, one particular class may be required to use the alternative depreciation system. The alternative depreciation system (ADS) is a depreciation schedule with an extended recovery period that better mirrors the asset's income streams than a regular declining balance depreciation.

The MACRS uses two methods to compute depreciation. These methods are the depreciating balance method and the straight-line method. The depreciating balance method applies a depreciation rate against the non-depreciated balance. The straight-line depreciation computes the depreciation cost of a fixed asset and is reduced uniformly over the life of the asset. It is possible to switch which method you use for your asset, but this will requires IRS approval.

At What Rate Will Your Asset Depreciate?

Once you have designated your asset type, you can figure out which of the eight property classes your asset belongs to, and thus, the rate at which it will depreciate. The eight major property classes that are helpful for the taxpayer to know are Three-Year, Five-Year, Seven-Year, 10-Year, 15-Year, 20-Year, 27.5-Year, and 39-Year property. 

The IRS provides a detailed list of property eligible for depreciation, including computers, computer equipment, automobiles, rental property, office furniture, and more, as well as the property class belonging to each item.