5 Year Property Depreciation: Examples and Rules

5 year property is tangible personal property with a five year MACRS recovery period, depreciated using the 200 percent declining balance method. Inside a building, it includes carpeting, appliances, cabinetry, decorative lighting, window treatments, and dedicated electrical and plumbing serving specific equipment. Because five years is well under the 20 year bonus depreciation ceiling, these components can be deducted in full in year one, which is where most of the value in a cost segregation study is created.

The Legal Test: Section 1245 Property Inside a Building

The question is not whether something is physically attached to the building. It is whether the item is Section 1245 personal property or a structural component of the building under Section 1250. The distinction traces back to the investment tax credit cases of the 1960s and 1970s, and the framework courts still use comes from Whiteco Industries v. Commissioner, 65 T.C. 664 (1975).

The Whiteco factors ask:

Is the item capable of being moved, and has it in fact been moved?
Is it designed or constructed to remain permanently in place?
Are there circumstances showing the item may need to be moved?
How substantial a job is removal, and how time consuming?
How much damage does removal cause?
How is the item affixed to the land or building?

An engineering based study applies these factors item by item and documents the conclusion. That documentation is the difference between a defensible position and a guess. See how to evaluate a cost segregation study.

What Typically Lands in the 5 Year Bucket

Category	Examples
Floor coverings	Carpeting, vinyl tile, removable laminate, floating floors
Appliances	Refrigerators, ranges, dishwashers, washers and dryers, microwaves
Cabinetry and counters	Kitchen and bath cabinets, vanities, countertops not structurally integrated
Decorative lighting	Chandeliers, pendants, sconces, accent and track lighting
Window treatments	Blinds, shades, drapery and hardware
Dedicated systems	Electrical and plumbing serving specific equipment rather than the building generally
Furniture and equipment	Furnishings in a furnished rental, security and AV systems, signage
Site items	Certain removable partitions, specialty millwork, decorative trim

Short term rentals tend to have the highest 5 year allocations because they are delivered furnished. A fully furnished Airbnb or VRBO property often carries 20 to 30 percent of depreciable basis in 5 year property, against roughly 10 to 15 percent for an unfurnished long term rental.

What Stays in the Building

These items are structural components and remain on the 27.5 or 39 year schedule regardless of how a study is marketed to you:

Foundation, framing, roof, exterior walls, load bearing interior walls
Windows and exterior doors
Central HVAC serving the building as a whole
General building electrical and plumbing
Elevators and escalators
Fire protection and sprinkler systems serving the building

A study that pushes central HVAC or general building wiring into 5 year property is taking an aggressive position that will not hold up. See common cost segregation myths.

The 5 Year Depreciation Schedule

Without bonus depreciation, 5 year property under the half year convention and 200 percent declining balance runs as follows:

Year	Rate	On $200,000 of basis
1	20.00%	$40,000
2	32.00%	$64,000
3	19.20%	$38,400
4	11.52%	$23,040
5	11.52%	$23,040
6	5.76%	$11,520

With 100 percent bonus depreciation, the entire $200,000 is deducted in year one and the schedule above becomes irrelevant. The table still matters if you elect out of bonus, if the property was placed in service during a partial bonus year, or if you are modeling a property acquired before January 20, 2025 under the old phase down.

What This Is Worth

Consider a $1,200,000 short term rental, of which $250,000 is land. Depreciable basis is $950,000.

	No study	With cost segregation
5 year property	$0	$237,500 (25%)
15 year improvements	$0	$95,000 (10%)
39 year structure	$950,000	$617,500
Year 1 depreciation	~$24,400	~$348,400
Value at 37% marginal rate	~$9,000	~$128,900

The deduction is only usable in year one if you can get past the passive loss rules, either through the short term rental 7 day exception with material participation, or through real estate professional status.

The Recapture Consequence

5 year property is Section 1245 property. On sale, all depreciation taken on those components is recaptured as ordinary income, not at the 25 percent unrecaptured 1250 rate that applies to the building. For a high bracket taxpayer, that can mean recapture at 37 percent on the very components that produced the largest deduction.

This is not a reason to skip cost segregation. Time value of money almost always favors taking the deduction now, and there are ways to manage the exit: a 1031 exchange, holding through a lower income year, or a partial asset disposition when components are replaced. But it should be modeled, not ignored. See what happens when you sell.

Frequently Asked Questions

What is 5 year property for depreciation?

5 year property is tangible personal property assigned a five year MACRS recovery period under Rev. Proc. 87-56, depreciated using the 200 percent declining balance method with a half year convention. In a building context it includes carpeting, appliances, cabinetry, decorative lighting, window treatments, furniture, and electrical or plumbing that serves specific equipment rather than the building generally.

Is carpet 5 year property?

Yes. Carpeting is generally treated as 5 year personal property rather than a structural component, because it is removable, has a shorter useful life than the building, and its removal does not damage the structure. Tile or hardwood permanently adhered to the subfloor is more likely to be treated as a structural component with the building's recovery period.

What percentage of a building is usually 5 year property?

It varies by property type. Unfurnished long term residential rentals commonly land between 10 and 15 percent of depreciable basis in 5 year property. Furnished short term rentals often reach 20 to 30 percent because the furniture, appliances, and decor are included. Restaurants, medical offices, and manufacturing facilities can be higher because of dedicated equipment and specialty systems.

Can I take 100 percent bonus depreciation on 5 year property?

Yes. 5 year property has a recovery period well under the 20 year ceiling in Section 168(k), so it qualifies for 100 percent bonus depreciation for property acquired and placed in service after January 19, 2025. Used property qualifies as long as it is new to you and was not acquired from a related party.

How is 5 year property taxed when I sell?

Depreciation claimed on 5 year property is recaptured as ordinary income under Section 1245 to the extent of gain. That is different from the building, where depreciation is unrecaptured Section 1250 gain taxed at a maximum of 25 percent. High bracket sellers should model the recapture cost against the time value of the earlier deduction, and consider a 1031 exchange or partial asset dispositions to manage it.

5 Year Property: What Cost Segregation Reclassifies and Why It Matters