What is the maximum annual depreciation rate allowed under the General Depreciation System for residential rental property placed into service?

The maximum annual depreciation rate allowed under the General Depreciation System (GDS) for residential rental property placed into service is 27.5%. This rate is applicable to properties that are classified as residential rental, which includes apartment buildings, rental houses, and similar properties designed to provide living accommodations.

The 27.5% depreciation rate is based on the Modified Accelerated Cost Recovery System (MACRS), which is the method used for calculating depreciation for most business property. Under this system, residential rental property is generally depreciated over a 27.5-year life span, leading to the annual depreciation rate of approximately 3.636% when calculated for tax purposes. However, the IRS allows the use of a straight-line method for ease of calculation, which simplifies reporting.

Understanding the context of the GDS framework is crucial, as it was designed to allow investors in residential rental properties to recover the investment in their buildings gradually and predictably over time. It reflects the recognition that such properties have a finite useful life in the eyes of tax policy, thus justifying the ability to deduct a portion of the property’s value annually.