716 / What is the deduction for depreciation?

Depreciation is a deduction that permits recovery, over a period of time, of capital invested in tangible property used in a trade or business or held for the production of income.¹ It is a deduction taken in arriving at adjusted gross income.² Only property that has a limited useful life may be depreciated. Land does not have a limited life and, therefore, cannot be depreciated. However, the improvements on land can be depreciated. Inventory and stock in trade are not depreciable.³ A taxpayer who purchases a term interest in property cannot amortize or depreciate the cost of the property during any period in which the remainder interest is held by a related person. This rule is effective for interests created or acquired after July 27, 1989, in taxable years ending after such date.⁴ However, life tenants and beneficiaries of estates and trusts may be allowed the regular depreciation deduction if the property is depreciable property.⁵

The method used to determine the rate of depreciation depends on when the property was placed into service. Property is “placed into service” when it is first placed in a condition or state of readiness and availability for a specifically assigned function for use in a trade or business, for the production of income, or in a tax-exempt or personal activity.⁶