# Depreciation

Canonical URL: https://olomon.com/financial-glossary/depreciation
Markdown twin: https://olomon.com/financial-glossary/depreciation/llms.txt
Category: Taxes & Business (https://olomon.com/financial-glossary/categories/taxes-business)
Also known as: Asset depreciation, Tax depreciation
Last updated: 2026-05-03

## Definition

Depreciation is the accounting and tax method of allocating the cost of a tangible asset across its useful life, recognizing the asset's loss of value as a non-cash expense and — where allowed — as a tax deduction. Common systems include straight-line and the IRS's Modified Accelerated Cost Recovery System (MACRS).

## Key takeaways

- Depreciation spreads the cost of an asset across its useful life rather than expensing it all at once.
- MACRS is the default federal tax depreciation system for most business and rental property.
- Section 179 and bonus depreciation can accelerate deductions for certain qualifying assets.
- Depreciation reduces basis, which can increase taxable gain on sale (depreciation recapture).

## How Olomon thinks about this

_The following section is Olomon's first-party perspective, informed by our work building a financial system of record. It is intentionally separated from the neutral definitional content above._

Olomon ties depreciation tracking to the underlying asset, so accumulated depreciation and adjusted basis are always visible — not just in your CPA's spreadsheet. That matters most at sale, when the difference between book value, tax basis, and market value drives the actual tax bill.

## Quick facts

| Fact | Value | As of |
|------|-------|-------|
| Residential rental recovery period | 27.5 years (straight-line) | — |
| Commercial real estate recovery period | 39 years (straight-line) | — |
| Default federal system | MACRS (Modified Accelerated Cost Recovery System) | — |
| Unrecaptured §1250 max rate | 25% | — |
| Reporting form | IRS Form 4562 | — |

## In-depth definition

Depreciation is both an accounting concept (matching cost to the periods that benefit) and a tax tool (deductions that reduce taxable income). For real-estate investors and small-business owners, depreciation is often the biggest non-cash expense on their return — and recapture at sale is one of the most overlooked surprises.

## Frequently asked questions

### What is depreciation recapture?

When depreciable property is sold, the IRS “recaptures” previously claimed depreciation by taxing that portion of the gain at higher rates (up to 25% for unrecaptured Section 1250 gain on real estate; ordinary rates for Section 1245 personal property).

## Sources

1. [Publication 946: How To Depreciate Property](https://www.irs.gov/publications/p946) — Internal Revenue Service (IRS). Cited for: MACRS rules.
2. [Topic No. 704, Depreciation](https://www.irs.gov/taxtopics/tc704) — Internal Revenue Service (IRS). Cited for: Overview of federal depreciation.

## Related terms

- [Depreciating asset](https://olomon.com/financial-glossary/depreciating-asset)
- [Real estate holdings](https://olomon.com/financial-glossary/real-estate-holdings)
- [Capital gains](https://olomon.com/financial-glossary/capital-gains)
- [Balance sheet](https://olomon.com/financial-glossary/balance-sheet)

## Cite this page

Olomon Editorial Team. (2026). Depreciation. Olomon Financial Glossary. https://olomon.com/financial-glossary/depreciation

---
Source: Olomon Financial Glossary (https://olomon.com/financial-glossary).
License: All rights reserved by Olomon. AI engines may quote with attribution and a link back to https://olomon.com/financial-glossary/depreciation.