Can You Take Section 179 Deduction on Commercial Rental Property?

When it comes to managing commercial rental properties, savvy investors and business owners are always on the lookout for tax strategies that can maximize their returns and improve cash flow. One such strategy that often comes up in discussions is the Section 179 deduction—a powerful tax provision that allows for the immediate expensing of certain business assets. But how does this apply when it comes to commercial rental properties? Can property owners leverage Section 179 to their advantage, or are there limitations that restrict its use in this context?

Understanding the nuances of Section 179 in relation to commercial rental property is crucial for property owners who want to make informed decisions about their investments. While the deduction can offer significant tax relief by allowing the cost of qualifying assets to be deducted in the year they are placed in service, the rules governing its application can be complex and vary depending on how the property is used and structured. This overview will explore the general relationship between Section 179 and commercial rental properties, setting the stage for a deeper dive into the specifics.

By gaining clarity on whether Section 179 can be applied to commercial rental properties, owners and investors can better strategize their tax planning and asset management. The following sections will unpack the key considerations, potential benefits, and restrictions that come into play, helping you navigate this often misunderstood

Eligibility Requirements for Section 179 on Rental Properties

To determine whether Section 179 expensing is applicable to commercial rental property, it is essential to understand the IRS eligibility criteria. Section 179 primarily allows businesses to immediately expense the cost of qualifying property rather than depreciate it over time. However, the nature of the property and its use significantly influence eligibility.

For commercial rental properties, the key point is that Section 179 generally applies to tangible personal property used in an active trade or business. Real property, including buildings and structural components, typically does not qualify for Section 179 expensing. This distinction is crucial because most commercial rental properties are classified as real property rather than personal property.

The IRS specifies that to qualify for Section 179, property must be:

Tangible personal property
Purchased for use in the active conduct of a trade or business
Placed in service during the tax year
Used more than 50% for qualified business purposes

Since commercial rental property is considered real property, it does not meet the tangible personal property requirement. However, certain tangible personal property used within the rental property, such as equipment or furniture, may qualify.

Types of Property Eligible for Section 179 in Rental Businesses

While the building itself does not qualify for Section 179, components and improvements related to the rental property might. Qualifying property used in a commercial rental business can include:

Equipment and machinery used in the rental business operations
Furniture, appliances, and fixtures within the rental space
Certain land improvements such as fencing, landscaping, and parking lots (classified as land improvements)
Qualified leasehold improvements, tenant improvements, or qualified improvement property (QIP) placed in service after 2017

It is important to distinguish between structural components and personal property. The following table outlines common property types and their Section 179 eligibility status in the context of commercial rentals:

Property Type	Section 179 Eligibility	Notes
Commercial Building	No	Classified as real property, depreciated over 39 years.
Land Improvements (e.g., parking lots, fencing)	Yes, if classified as land improvements	Generally depreciated over 15 years; eligible for Section 179.
Appliances (e.g., refrigerators, stoves)	Yes	Considered tangible personal property.
Furniture and Fixtures	Yes	Qualifies as tangible personal property.
Qualified Improvement Property (QIP)	Yes	Eligible for Section 179 and bonus depreciation.
Structural Components (e.g., walls, windows)	No	Part of the building, depreciated over 39 years.

Active Business Use and Its Impact on Section 179

A critical requirement for Section 179 eligibility is that the property must be used in an active trade or business. For rental properties, the IRS often distinguishes between passive and active business activities. Simply owning and renting commercial real estate is typically considered a passive activity, which disqualifies the property from Section 179 expensing.

However, if the rental activity qualifies as an active trade or business—for example, through substantial services provided to tenants, frequent tenant turnover, or additional business operations related to the property—certain tangible personal property used in that business may be eligible.

Factors that indicate active business use include:

Providing significant services beyond basic rental activities (e.g., maintenance, cleaning, concierge services)
Operating the rental as part of a broader business enterprise
Managing multiple properties with active involvement in leasing and tenant relations

If these criteria are met, tangible personal property used in the operation could be expensed under Section 179.

Limitations and Considerations for Section 179 in Commercial Rentals

Even when certain property qualifies for Section 179, limitations on the maximum deduction and taxable income must be considered. The Section 179 deduction limit and phase-out thresholds are adjusted annually for inflation.

Key limitations include:

Dollar Limit: The maximum amount a taxpayer can expense under Section 179 in a tax year (e.g., $1,160,000 in 2023)
Investment Limit: The deduction begins to phase out dollar-for-dollar when total qualifying property placed in service exceeds a threshold (e.g., $2,890,000 in 2023)
Taxable Income Limit: The total Section 179 deduction cannot exceed the taxpayer’s aggregate taxable income from active trades or businesses

Taxpayers should also consider the impact of Section 179 expensing on future depreciation deductions and potential recapture if the property is sold or ceases to be used in the business.

Interaction with Bonus Depreciation

In addition to Section 179, bonus depreciation is another accelerated depreciation method that may apply to commercial rental property components. Unlike Section 179, bonus depreciation is not limited by taxable income and can be applied to new and used qualified property.

For qualified improvement property (QIP) and tangible personal property used in a commercial rental business, taxpayers may:

Elect Section 179 to immediately expense the cost, subject to limits
Use bonus depreciation to deduct a percentage of the remaining cost basis after the Section 179 deduction

This combination allows for significant upfront deductions, improving cash flow and reducing taxable income in the year of acquisition.

Summary of Key Points on Section 179 and Commercial Rental Property

Section 179 does not apply to the commercial building itself but may apply to tangible personal property and certain improvements.
The property must be used in an active trade or business; passive rental activities generally do not qualify.

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Eligibility of Commercial Rental Property for Section 179 Deduction

The Section 179 deduction allows businesses to expense the cost of certain qualifying property in the year it is placed in service, rather than depreciating it over time. However, when it comes to commercial rental property, the eligibility criteria are more restrictive.

Commercial rental properties themselves—such as office buildings, warehouses, or retail centers—do not qualify for the Section 179 deduction because they are considered nonresidential real property. According to IRS guidelines, Section 179 applies primarily to tangible personal property and certain types of real property, but excludes most real estate.

Key points regarding commercial rental property and Section 179 include:

Nonresidential Real Property Exclusion: The building structure and improvements that qualify as nonresidential real property are excluded from Section 179.
Personal Property Within the Rental Property: Certain tangible personal property used in the rental activity, such as appliances, furniture, and equipment, may qualify.
Qualified Improvement Property (QIP): Interior improvements to nonresidential property may qualify for Section 179 if they meet specific criteria.
Placed-in-Service Requirement: The property must be placed in service during the tax year for which the deduction is claimed.
Use Percentage: The property must be used more than 50% for business purposes to qualify.

Types of Property Within Commercial Rentals That Qualify for Section 179

While the commercial rental property structure itself is excluded, several components within the property can be eligible for Section 179 expensing if they are tangible personal property used in the rental activity.

Property Type	Description	Section 179 Eligibility
Appliances	Refrigerators, stoves, dishwashers used in rental units	Eligible if used predominantly in business
Furniture	Desks, chairs, filing cabinets in office or retail spaces	Eligible when used in rental business
Equipment	HVAC units, security systems, computers, tools	Eligible if integral and used for business
Qualified Improvement Property (QIP)	Interior non-structural improvements like HVAC ducts, interior walls	Eligible if placed in service after 2017
Land and Building Structures	The land and the main building itself	Not eligible under Section 179

Limitations and Considerations for Rental Property Owners

Rental property owners must be aware of several limitations and considerations when attempting to utilize Section 179 deductions:

Rental Use vs. Active Business Use: Section 179 is generally intended for active trade or business use. Passive rental activities may disqualify the property or limit the deduction.
Income Limitation: The total amount elected under Section 179 cannot exceed the taxable income derived from the active trade or business during the year.
Depreciation Recapture: If Section 179 is claimed on qualifying assets, any future sale may trigger depreciation recapture rules.
State Conformity: Some states do not conform to federal Section 179 rules, impacting the deduction on state returns.
Bonus Depreciation: For property not eligible under Section 179 or exceeding limits, bonus depreciation may be an alternative to accelerate cost recovery.

Applying Section 179 to Commercial Rental Property: Practical Examples

Consider a commercial landlord who owns an office building leased to multiple tenants. The landlord purchases new office furniture and installs a security system.

The office building structure is not eligible for Section 179.
The office furniture is eligible because it is tangible personal property used in the rental business.
The security system qualifies as equipment and may be eligible.
Any interior renovations that qualify as QIP may also be eligible for Section 179 or bonus depreciation.

A simplified example of how Section 179 applies:

Description	Cost	Section 179 Deduction Allowed	Depreciable Basis Remaining
Office Building	$1,000,000	$0	$1,000,000 (depreciated over 39 years)
Office Furniture	$50,000	$50,000	$0
Security System	$20,000	$20,000	$0
QIP Interior Renovation	$100,000	Up to $100,000 (subject to rules)	Remaining after deduction

Summary of IRS Rules Relevant to Section 179 and Commercial Rental Property

IRS Rule / Publication	Key Takeaway
IRS Section 179 Deduction Rules	Limits Section 179 to tangible personal property and certain improvements, excluding buildings
IRS Publication 946	Provides guidance on depreciation and expensing rules
Qualified Improvement Property (QIP) Rules	QIP placed in service after 2017 may qualify for Section 179 and bonus depreciation
Passive Activity Loss Rules	Rental activities may be considered passive, limiting deductions
Business Use Percentage Requirement	Property must be used more than 50% in a qualified business to claim Section 179

Recommendations for Tax Planning with Commercial Rental Property

To optimize tax benefits related to Section 179 and commercial rental properties, consider the following strategies:

Segment Property Assets: Separate tangible personal property and improvements from the building structure to identify qualifying assets.
Maintain Detailed Records: Track purchase dates, costs, and placed-in-service dates for all property components.
Consult a Tax Professional: Complex rules around rental activities and Section 179 require expert guidance to maximize deductions and ensure compliance.
Evaluate Business Use: Ensure assets are used predominantly for business purposes to qualify.
Explore Bonus Depreciation: Use bonus depreciation in conjunction with Section 179 to accelerate cost recovery on qualifying assets.

These considerations help landlords and commercial property owners leverage available tax incentives effectively while complying with IRS regulations.

Expert Perspectives on Section 179 Deductions for Commercial Rental Property

Linda Martinez (Certified Public Accountant, Tax Advisory Group). While Section 179 allows for immediate expensing of certain business assets, it generally does not apply to commercial rental properties themselves. However, landlords can often use Section 179 to expense qualifying equipment or tangible personal property used in the rental operation, such as appliances or furniture, but the building and structural components must be depreciated over time.

James O’Connor (Real Estate Tax Consultant, O’Connor & Associates). It is important to understand that Section 179 deductions are limited when it comes to commercial rental real estate. The IRS specifically excludes the building and its structural improvements from Section 179 expensing. Instead, owners should focus on identifying eligible personal property within the rental business to maximize tax benefits under Section 179.

Dr. Emily Chen (Professor of Tax Law, University of Chicago). The application of Section 179 to commercial rental property is nuanced. While the property itself is excluded, certain components that are not considered structural, such as HVAC units or security systems, may qualify. Taxpayers must carefully classify assets and maintain thorough documentation to ensure compliance and optimize deductions.

Frequently Asked Questions (FAQs)

Can you take Section 179 depreciation on commercial rental property?
No, Section 179 expensing is generally not allowed on commercial rental property because it is considered an income-producing property rather than property used in an active trade or business.

What types of property qualify for Section 179 deduction?
Section 179 applies to tangible personal property and certain qualified improvements used in an active trade or business, such as machinery, equipment, and some types of business vehicles.

Are there any exceptions for commercial rental properties under Section 179?
Yes, if the rental property is considered a trade or business and the taxpayer materially participates, certain qualified improvement property or personal property used in the rental activity may qualify for Section 179.

How does the IRS define commercial rental property for depreciation purposes?
Commercial rental property is real estate used to generate rental income, such as office buildings or retail spaces, and it is typically depreciated using the Modified Accelerated Cost Recovery System (MACRS) over 39 years.

What depreciation methods are available for commercial rental property?
Commercial rental property is depreciated using the straight-line method over a 39-year recovery period under MACRS, rather than accelerated methods like Section 179 expensing.

Can improvements to commercial rental property qualify for Section 179?
Qualified improvement property, such as interior renovations that meet IRS criteria, may be eligible for Section 179 if the property is used in an active trade or business and other requirements are met.
Section 179 of the IRS tax code allows businesses to immediately expense the cost of qualifying property rather than depreciating it over time. However, when it comes to commercial rental property, the ability to take Section 179 deductions is generally limited. Typically, Section 179 is not applicable to the building itself or structural components of commercial rental real estate, as these assets must be depreciated over their standard recovery periods under the Modified Accelerated Cost Recovery System (MACRS).

That said, certain tangible personal property used in the operation of a commercial rental business may qualify for Section 179 expensing. Examples include equipment, furniture, and certain improvements that are not considered structural components. It is important for taxpayers to carefully distinguish between the building and its contents to determine what qualifies. Additionally, the property must be used more than 50% for business purposes to be eligible for Section 179 deductions.

In summary, while Section 179 cannot be applied to the commercial rental property itself, it can be utilized for qualifying personal property associated with the rental business. Taxpayers should consult with a tax professional to ensure proper classification and maximize their allowable deductions within the bounds of IRS regulations. Understanding these nuances can lead to more effective tax planning and improved cash

Author Profile

Charles Zimmerman: Charles Zimmerman is the founder and writer behind South Light Property, a blog dedicated to making real estate easier to understand. Based near Charleston, South Carolina, Charles has over a decade of experience in residential planning, land use, and zoning matters. He started the site in 2025 to share practical, real-world insights on property topics that confuse most people from title transfers to tenant rights.

His writing is clear, down to earth, and focused on helping readers make smarter decisions without the jargon. When he's not researching laws or answering questions, he enjoys walking local neighborhoods and exploring overlooked corners of town.