Depreciation and the Taxation of Real Estate Page: 2 of 16
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Depreciation and the Taxation of Real Estate
The Tax Reform Act of 1986 set up a depreciation system designed to equalize tax burdens on
different types of assets. The recovery period for nonresidential structures was, however,
lengthened in 1993. Economic conditions and practices that may bear on this issue have also
changed. Lately, there has been some interest in reexamining this depreciation structure. For
example, H.R. 4328, The Omnibus Consolidated and Emergency Supplemental Appropriations
Act of 1998, mandated the Treasury Department to study current tax depreciation rules and how
they relate to tax burdens. This report provides background information relating to tax
depreciation of structures, including a discussion of the methods of measuring economic
The first section of this report provides a description and history of the treatment of structures
under the depreciation system. This analysis indicates that depreciation of nonresidential
structures is more restrictive today than at any time since 1953, while depreciation on residential
structures is more restrictive than it has been since 1971.
The second section discusses the very complex problems associated with estimating economic
depreciation rates and reviews the evidence from the economics literature on these rates.
The third section compares, in light of evidence on economic depreciation, the tax burdens on
equipment and alternative types of structures, how that tax burden has changed, and what
changes, given economic depreciation estimates, would be necessary to restore equal tax burdens
across basic asset categories. These estimates indicate that lengthening the life for equipment by
about 4 years, or shortening the tax life for structures to around 20 years would restore equal
treatment across assets.
The fourth section of the paper discusses whether the use of debt finance, which has been argued
to be greater for structures than for other assets, should be taken into account in setting up
depreciation rules. This argument which has been made in the past. This analysis suggests that
adjusting depreciation rules to address another tax distortion is less desirable than addressing the
distortion directly. Moreover, there are other offsetting tax burdens on structures (such as property
taxes), which could justify offsetting more generous rules. At any rate, the available evidence
does not support the claim that structures are more leveraged than other assets.
This report will be updated as developments warrant.
Congressional Research Service
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Depreciation and the Taxation of Real Estate, report, October 25, 2000; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc819767/m1/2/: accessed October 15, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.