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Recovery Property

DEFINITION

The term recovery property was used to describe a special category of depreciable real property recognized within the Accelerated Cost Recovery System (ACRS), which was in force from 1980 to 1986. The ACRS was later replaced by the Modified Accelerated Cost Recovery System (MACRS) in 1986.

EXPLANATION

The term recovery property was a special status allocated to depreciable property from 1980 to 1986 when the ACRS was still in force. However, this special classification was abandoned when the ACRS was replaced with the MACRS in December 1986.

The ACRS was part of the Economic Recovery Tax Act of 1981 and it applied to depreciating assets that were acquired between 1980 and 1986. The ACRS allowed U.S taxpayers to depreciate assets using shorter lifespans (recovery periods) in order to quickly recoup their costs.

How the ACRS Came Into Being

The main goal of the ACRS was to allow businesses and individuals to claim larger amounts of depreciation deductions on qualifying recovery properties in order to increase their tax return. The proponents of the law thought that by claiming bigger deductions, businesses would have larger tax returns, which would allow the companies to retain more of the revenues generated by the depreciable assets.

The higher tax returns also meant that businesses would have the capacity to repay any debts associated with the recovery properties while growing their profits at the same time.

Recovery Property under the MACRS

Although the term recovery property does not feature in the MACRS, there is still a provision for tangible property that depreciates within the new system. Under the MACRS, property owners can recoup the costs of their depreciable assets over a specific period as stipulated by the Internal Revenue Service (IRS). The category of each asset is based on its useful life and deductions for depreciation are allowed on an annual basis.

There are three methods through which a business can account for depreciation under the MACRS, which are according to the property’s class useful life, using alternative depreciation, and using regular depreciation. There are only two methods used to calculate depreciation under the MACRS, which are the straight-line method and the depreciating balance method. You can change the depreciation method applicable to your asset only with approval from the IRS.

How to Determine an Asset’s Depreciation Rate

The first step to determining an asset’s depreciation rate is to identify its asset type and then the property class to which the asset belongs. There are eight major property classes defined by the IRS, which are: 3-year, 5-year, 7-year, 10-year, 15-year, and 20-year as well as 27.5-year properties and 39-year properties.

You can get an in-depth description of all the properties that fall under each class from the IRS.

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