Rental property depreciation lets you deduct the cost of your building over time, reducing your taxable rental income each year. For residential rental property, the IRS requires you to spread the deduction over 27.5 years using the straight-line method. The math itself is straightforward, but getting the inputs right is where most of the work happens.
Find Your Depreciable Basis
You can only depreciate the building, not the land underneath it. That means your first step is splitting the total purchase price into two pieces: the value of the land and the value of the structure. The IRS says you should allocate based on the ratio of each asset’s fair market value to the total property value at the time of purchase.
If you’re not sure how to determine fair market values separately, the IRS offers a practical shortcut: use the assessed values from your local property tax bill. Most counties break the assessment into land and improvements. If your tax assessment shows land at $60,000 and improvements at $140,000, the building represents 70% of the total assessed value. Apply that 70% to your actual purchase price to get your depreciable basis.
For example, say you bought a rental property for $300,000. Using the 70% ratio from the tax assessment, your depreciable basis for the building would be $210,000. The remaining $90,000 allocated to land is never depreciated.
Your depreciable basis also includes certain costs beyond the purchase price. Closing costs like title insurance, recording fees, legal fees related to the purchase, and transfer taxes get added to your basis. Seller credits or purchase price adjustments reduce it. The goal is to capture the full cost of acquiring the building itself.
The Straight-Line Calculation
Residential rental property uses a 27.5-year recovery period. The formula is simple: divide your depreciable basis by 27.5. Using the example above, $210,000 divided by 27.5 gives you $7,636 per year in depreciation. That amount comes directly off your rental income on Schedule E of your tax return.
The IRS requires you to use the mid-month convention, which means the property is treated as though you placed it in service in the middle of the month you started renting it, regardless of the actual date. If you close on a rental property and make it available to tenants on March 3, you’re treated as starting depreciation on March 15. For that first year, you’d only claim depreciation for 9.5 months out of 12. The same rule applies in the final year: you get a half-month of depreciation for the month you sell or stop renting.
To calculate the first-year deduction, take your annual depreciation amount and multiply it by the fraction of the year remaining. If you place the property in service in June, you get 6.5 months of depreciation that year (half of June through December), so your first-year deduction would be $7,636 times 6.5/12, or about $4,136.
Depreciating Improvements and Components
Capital improvements you make after purchasing the property get their own depreciation schedule. A new roof, HVAC system, or kitchen renovation starts a fresh 27.5-year clock from the date the improvement is placed in service. You don’t add improvements to the original building’s depreciation schedule.
Certain components of a rental property have shorter recovery periods than the building itself. Appliances, carpeting, and furniture used in a rental are classified as personal property with recovery periods of 5 or 7 years. Land improvements like fences, driveways, and landscaping typically use a 15-year recovery period. These shorter-lived assets can be depreciated faster, which front-loads your deductions.
A cost segregation study is a formal analysis that identifies which parts of your property qualify for these shorter recovery periods. An engineer or tax specialist goes through the property and reclassifies components that would otherwise be lumped into the 27.5-year building category. This is most worthwhile for higher-value properties where the tax savings justify the cost of the study, which typically runs several thousand dollars.
Bonus Depreciation on Qualifying Components
Under the One Big Beautiful Bill Act, qualifying property placed in service after January 19, 2025, is eligible for 100% bonus depreciation. This means shorter-lived assets like equipment, fixtures, and land improvements associated with a rental property can be fully deducted in the first year rather than spread over their normal recovery periods.
The building itself typically does not qualify for bonus depreciation. This benefit applies to the types of components identified through a cost segregation study: things like appliances, certain electrical systems, decorative finishes, paving, and fencing. If you’ve done a cost segregation study and reclassified $40,000 of your property into 5-year and 15-year categories, you could potentially deduct that entire $40,000 in the first year instead of spreading it out.
A Full Example
Suppose you buy a rental house for $350,000 in August. Your property tax assessment allocates 25% to land and 75% to the building. You also pay $6,000 in eligible closing costs.
- Total cost: $350,000 + $6,000 = $356,000
- Land allocation (25%): $89,000 (not depreciable)
- Building allocation (75%): $267,000
- Annual depreciation: $267,000 / 27.5 = $9,709
- First-year depreciation (placed in service in August): $9,709 × 4.5/12 = $3,641
Starting in year two, you claim the full $9,709 each year. In year 28, you claim only the remaining partial amount to reach your total basis.
When Depreciation Must Begin
Depreciation starts when the property is “placed in service,” meaning it’s ready and available for rent. This isn’t necessarily the date you close on the purchase. If you buy a property in April but spend two months renovating before listing it for tenants in June, your depreciation clock starts in June. You can’t depreciate a property while you’re personally using it or while it sits vacant before being made available to renters for the first time.
Once the property is placed in service, you must take the depreciation deduction every year, even if you’d rather not. The IRS treats depreciation as “allowed or allowable,” meaning when you eventually sell, they’ll calculate recapture based on the depreciation you should have taken, whether or not you actually claimed it.
Depreciation Recapture When You Sell
All those annual deductions come with a catch. When you sell the property, the IRS recaptures the depreciation by taxing it at a rate of up to 25%. This is separate from (and in addition to) any capital gains tax on the property’s appreciation.
Here’s how it works. If you claimed $100,000 in total depreciation over the years you owned the property, that $100,000 is taxed at up to 25% when you sell, regardless of your regular income tax bracket. Any profit above your original purchase price is taxed at capital gains rates. This means you’re not avoiding taxes with depreciation so much as deferring them, though the 25% recapture rate is often lower than the ordinary income tax rates you offset during the years you held the property.
A 1031 exchange allows you to defer both capital gains and depreciation recapture by reinvesting the sale proceeds into another qualifying property. The recapture obligation carries forward to the replacement property, but it lets you keep your capital working rather than paying a large tax bill at the time of sale.
Tracking Your Depreciation
Keep detailed records from day one. You’ll need the closing disclosure from your purchase, the property tax assessment showing the land and building split, receipts for any capital improvements, and the date each asset was placed in service. Each improvement gets its own line on IRS Form 4562, which is where you report depreciation.
Tax software handles the annual calculations once you enter the basis, placed-in-service date, and recovery period. If you own multiple properties or have done a cost segregation study, a spreadsheet tracking each asset’s original cost, accumulated depreciation, and remaining basis will save you significant headaches at tax time and when you eventually sell.