Rental property depreciation: what you can deduct and why it matters

Depreciation is the IRS's acknowledgment that buildings wear out over time. For residential rental property, the IRS allows you to deduct 1/27.5 of the building's value each year for 27.5 years. For commercial property, it's 1/39 per year over 39 years. This is a paper deduction — you don't spend any money to take it. On a $280,000 building with $50,000 of land value, the $230,000 depreciable basis produces a $8,364 deduction every year. At a 24% combined marginal rate, that's $2,007 per year that doesn't get paid to the IRS.

Land is never depreciable — and why that matters

The IRS requires you to separate land from the building value before calculating depreciation. Land doesn't wear out, so it cannot be depreciated. Using the full purchase price would overstate the deduction and create a problem at sale. Most real estate agents and lenders have an opinion on the land/building split, but the most defensible approach is to use the county tax assessor's allocation — that's the number the IRS will reference if audited.

If you don't have an assessor's breakdown, using 15–25% for land in a typical suburban area is a reasonable starting point. Urban properties with high land values (downtown condos, commercial in dense areas) can be 40–60% land. Rural properties with significant acreage can be even higher. Getting this right matters because it affects both your annual deduction and your exposure at sale.

How to report it: Schedule E and Form 4562

Rental income and expenses — including depreciation — are reported on Schedule E. The depreciation deduction itself flows from Form 4562 (Depreciation and Amortization), which your tax software or CPA handles. For most single-family or small multifamily rentals, straight-line depreciation over 27.5 years is the only method in play. You establish the depreciable basis in the year you place the property in service, and the deduction continues each year until the basis is fully recovered or you sell.

Depreciation doesn't require cash to be spent — it reduces your taxable rental income without reducing your bank account. This is why rental properties that barely break even on a cash flow basis often show a tax loss on Schedule E: depreciation creates a "phantom" deduction. Combined with a home office deduction for property management activity, rental real estate is one of the most tax-efficient income sources available.

Depreciation recapture: the tax bill when you sell

Every dollar of depreciation you deduct reduces your cost basis in the property. When you sell, the gain is calculated against this reduced basis — which means you owe tax on the accumulated depreciation you claimed. This is called Section 1250 depreciation recapture, and it's taxed at a maximum federal rate of 25%, regardless of your long-term capital gains rate.

On a property you've owned for 10 years with $83,636 in accumulated depreciation (at $8,364/year), selling at any gain means the first $83,636 of your "gain" is subject to 25% federal recapture tax — not the standard LTCG rate. The rest of the gain above original cost basis is taxed at normal long-term rates. This is not a reason to skip depreciation: you owe recapture whether or not you actually took the deduction. Failing to claim depreciation and then still owing recapture at sale is the worst outcome. Use the capital gains calculator alongside this one when planning a rental property sale.

Cost segregation: accelerating the deduction

Straight-line depreciation over 27.5 years is the default, but it's not the only option. A cost segregation study reclassifies components of the property — flooring, cabinetry, landscaping, electrical improvements — into shorter-lived asset classes (5, 7, or 15 years). This front-loads the depreciation deductions, often significantly. A $500,000 commercial building with a cost segregation study might capture $80,000–$100,000 in deductions in year one versus $12,820 under straight-line.

Cost segregation studies typically cost $5,000–$15,000 for a residential property and make economic sense for properties above $500K or when the owner has significant ordinary income to shelter. For most small landlords with one or two residential rentals, straight-line depreciation over 27.5 years is the practical path. The quarterly tax estimator can help you see how rental depreciation affects your estimated tax payments year-over-year.

Depreciation calculations use the IRS straight-line method only. First-year partial-year conventions and MACRS mid-month conventions are not applied — results are approximate. Depreciation recapture rates and cost segregation rules are federal only and may differ at the state level. Consult a CPA or real estate tax advisor before filing.