What is depreciation and why use it? Depreciation (also called Cost Recovery) is a tax deduction for the building portion of a property — land is never depreciated. All current tax laws use Straight Line Depreciation regardless of asset life. Commercial property: 39 year life. Residential property (apartments): 27.5 year life. Personal property items with shorter useful lives (e.g. carpets, equipment) commonly use a 7 year life and depreciate faster per year as a result.

Calculation: Straight Line depreciation = Depreciable Amount divided by Depreciable Life. Example: $390,000 depreciable amount over 39 years = $10,000 per year. The Audit Window confirms $10,000 shown for the middle years (year 2, 3, 4) — but the first year (and the final year) will be a smaller, partial amount due to IRS averaging conventions, calculated automatically by planEASe based on the Depreciable Life entered.

Straight Line, No First Half Period is a separate method useful specifically when analyzing the continued hold of an already-owned property (where the mid-period convention from original acquisition doesn't apply going forward).

The 1986 Tax Reform Act mandated several averaging conventions which change the way depreciation is taken. Specifically, all personal property depreciation is subject to a "half year" convention where the first year depreciation amount is one half the amount allowed for the full year no matter when the property is placed into service. A half year deduction is allowed in the year of disposition again without regard to the actual time of disposition within the year. Similar rules apply to real estate depreciation except that the period is a "half month" instead of a half year. To further confuse things, personal property placed in service during the last three months of the year is subject to a "half quarter" rule rather than the half year rule if that property constitutes more than 40% of the aggregate basis of property placed into service that year (without regard to whether the asset is real estate or real estate related). planEASe computes straight line, declining balance, and sum of the years digits according to these rules.

To tell which convention to use, planEASe looks at the Depreciable Life. If the life is greater than 20 years, the half month rule is used (typical for real estate — 39 year and 27.5 year property). Otherwise the half year rule is used unless the depreciation starts in October or later, in which case the half quarter rule is used (typical for personal property — 7 year items like carpets and equipment). This is why a 7-year asset shows a noticeably smaller first-year deduction than a 19-year or 39-year asset — the mid-year convention takes a much bigger bite out of the first year than the mid-month convention does. planEASe applies all of these conventions automatically based solely on the Depreciable Life entered — no manual selection needed.