What are the two categories used to divide real property for MACRS purposes?

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For Modified Accelerated Cost Recovery System (MACRS) purposes, real property is categorized into two distinct groups: residential and nonresidential. This classification is vital because it determines the depreciation methods and recovery periods applicable to different types of real property.

Residential property typically includes rental properties, apartments, and similar assets where people reside. Under MACRS, residential property is depreciated over a 27.5-year recovery period using the straight-line method.

Nonresidential property encompasses a broader range of structures, including offices, retail stores, and warehouses, which are depreciated over a 39-year recovery period using the same straight-line method. This distinction is crucial for tax preparers, as it influences how clients may claim depreciation on their tax returns, reflecting the asset's wear and tear over its useful life in a tax-compliant manner.

By properly classifying real property in line with these categories, tax professionals can ensure accurate reporting and adherence to IRS regulations, maximizing potential tax benefits for their clients.

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