Five-Year Property: Cost Segregation Classification and Deductions
By AE Tax Advisors ยท Published 2026-08-13
Updated November 8, 2026.
Five-year property is an assigned recovery category, not a percentage of a building that every owner can claim. Cost segregation analyzes the actual components, their function and the applicable asset classes. Some items are personal property; others remain structural building components or belong in another class.
Which items can belong in a five-year category?
Common residential-rental examples include qualifying appliances, carpeting and furniture. Computers and certain other equipment also commonly use five-year GDS treatment. The exact business activity and asset class matter. General office furniture ordinarily uses seven years, so a list saying all furniture is five-year property is incomplete.
Cabinetry, counters, lighting, flooring and dedicated utility connections need a fact-specific classification. Permanent attachment is relevant but does not answer the entire question. Evaluate function, relationship to the building or equipment, permanence and removal facts. Do not label every kitchen cabinet or decorative fixture as five-year property.
What the study should substantiate
- The asset's identity, quantity, location and actual function.
- Supported allocation of original cost, including appropriate indirect costs.
- Why the selected recovery period and property category apply.
- Acquisition and placed-in-service dates, and later improvements.
- Reconciliation back to total depreciable basis, excluding land.
No universal 10%, 20% or 30% allocation should be promised before reviewing the property. A furnished rental may contain additional personal property, but the invoices and underlying facts must support the amount. A component cannot be counted once as separately purchased furniture and again inside allocated building cost.
Regular depreciation without a first-year allowance
For five-year GDS property using 200% declining balance and the half-year convention, with no Section 179, bonus or early disposition, the six tax-year percentages are 20%, 32%, 19.2%, 11.52%, 11.52% and 5.76%. This is an illustration of one method and convention, not the table for every five-year asset.
For $20,000 of basis under those assumptions, first-year depreciation is $4,000. A mid-quarter convention or another required method changes the result. Check the MACRS schedule guide before selecting percentages.
Bonus eligibility does not follow from the label alone
Qualifying property acquired and placed in service after January 19, 2025 generally can receive the restored 100% allowance. Related-party purchases, prior use, mandatory ADS, dates and elections can affect eligibility. A study performed in 2026 does not give every older acquisition the 2026 rules.
For an eligible $20,000 asset receiving 100% bonus, the first-year depreciation could be $20,000 rather than $4,000. That is a deduction comparison, not a $16,000 tax refund. Passive-activity and other loss limits can defer the tax benefit.
Plan the eventual disposition
For Section 1245 property, gain can be ordinary-income recapture up to the applicable depreciation amount. Recapture is limited by the gain calculation; a sale at a loss does not automatically recapture all prior deductions. Allocate sale proceeds among assets using supportable values.
Section 1031 generally does not cover personal property. Exchanging a building therefore does not automatically defer gain on its furniture or other separately classified personal property. Nor does every removed component qualify for a partial-disposition deduction. Model the actual sale or retirement rather than assuming the original write-off is a permanent tax saving.
Book a Cost Seg Discovery Call with closing documents, improvement invoices, existing schedules and any study. Compare the current benefit with cost, limitations and planned ownership period.
Frequently Asked Questions
Are all cabinets and light fixtures five-year assets?
No. Their function, permanence and relationship to the building or equipment require review.
Is there a standard percentage to reclassify?
No. The actual property and supported cost allocation determine the result.
Will a 1031 exchange defer tax on all five-year property?
No. Section 1031 generally applies to qualifying real property, not personal property.
Sources and update notes
Source references and the changes described in this guide were checked November 8, 2026. Published by AE Tax Advisors; see our editorial policy. Examples are illustrative and require review of your records before filing.