On a different thread, I was challenged by my usual sparring partner @Eamonn McElroy. Our purely theoretical disagreement was over a $100k excavator to be used in a rental business, which I'd call a stretch to even consider. Anyway, if such scenario were to happen, would it warrant the 5-yr (per Eamonn) or the 7-yr (per Michael) recovery period for depreciation?

If you respond with "who cares", you'd be right. However, this rather immaterial debate got me curious about the specifics of the 5-yr depreciation we all are so used to when dealing with appliances and carpets. My vague memory (yeah, I started back in 1996, before some of the BP members were born) whispered that there used to be some controversy surrounding 5-yr v. 7-yr depreciation until the IRS one day confirmed it should be 5-yr. We even had to amend some tax returns when it happened. Anyway, I decided to waste some of my time on research.

Found some interesting stuff. First, this is not codified. Section 168(e)(3) of the Code defines 5-yr and 7-yr property, along with the other types, but it does not mention the 5-yr rule for rentals. Depreciation details are not addressed in the Regulations, either. Instead, we rely on the 30-yr old Revenue Procedure 87-56 which contains multiple tables, including defining industry-specific Asset Classes. If you're determined to dig it up and kill yourself searching thru it (or its numerous reproductions in technical guides on depreciation), you will not find any explicit reference to the rental business.

Where is it found, then? Believe it or not, even professional reference sources like the Quickfinder cite... the IRS Publication 527 "Residential Rental Property"! Surprising, considering the fact that the IRS publications are merely interpretations that carry zero legal authority and cannot be referenced if you're to fight the IRS. Yet, here we are, asked to rely on Pub 527:
https://www.irs.gov/publications/p527#en_US_2019_publink1000219075

Quoting from the esteemed publication:
5-year property... This class also includes appliances, carpeting, and furniture used in a residential rental real estate activity.

With the addition of an ambiguous "etc.", the same statement is included in another IRS Publication, Pub 946 "How to depreciate property":
https://www.irs.gov/publications/p946#en_US_2019_publink1000107513
"...Appliances, carpets, furniture, etc., used in a residential rental real estate activity"

Well, where did the publications pull this statement from? Apparently from a rather obscure source, IRS Announcement 99-82 which said:
"...The 1998 instructions for Form 4562, Depreciation and Amortization, and Publication 527, Residential Rental Property, classify certain personal property used in a rental real estate activity (appliances, carpeting, furniture, etc.) as 7-year property. The correct classification is 5-year property..."

I was fascinated (yeah, does not take much) with the justification used by the IRS: "...This property is included in Asset Class 57.0, Distributive Trades and Services (see Rev. Proc. 87–56, 1987–2 C.B. 674)..."

Wondering what that Asset Class 57.0 is? Here you go:
"57.0 DISTRIBUTIVE TRADES AND SERVICES:
Includes assets used in wholesale and retail trade, and personal and professional services."

Granted, English is my second language, and IRS is my third, which probably explains why I am struggling to see how being a landlord fits into the above definition. But who am I to protest? If the IRS gives us 5 years instead of 7, I will take it.

This humble research left me wondering what else might similarly fit under the 57.0 umbrella? It seems much broader than the fairly restrictive clause from the two publications. If the IRS considers landlording to be a distributive trade or business, would not construction and flipping qualify as well, under the above definition? And which assets can be pulled into the 5-yr depreciation then?

Maybe we can, after all, apply 5-yr life to a $100k excavator. Of course, in real life, we would probably use the 100% bonus or Sec. 179 to write it off completely in the first year anyway, making the entire debate pointless. Pointless but fun nevertheless.

5-yr depreciation - for tax geeks

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