Depreciation on rental property is a tax deduction that lets you recover the cost of a building over time, reflecting the wear and tear it undergoes while generating rental income. For residential rental property, the IRS allows you to deduct a portion of the building’s cost each year over 27.5 years. This deduction reduces your taxable rental income, often significantly, even though you’re not spending any additional cash to claim it.
How Rental Property Depreciation Works
When you buy a rental property, the IRS treats the building as an asset that gradually wears out. Rather than deducting the entire purchase price in the year you buy it, you spread that cost across the property’s “recovery period.” For residential rentals (houses, apartments, duplexes, condos used as rentals), that period is 27.5 years. Commercial rental buildings use a 39-year recovery period.
The method used is called straight-line depreciation, meaning you deduct the same amount every year. If your depreciable basis is $275,000, for example, your annual depreciation deduction is $10,000 ($275,000 divided by 27.5). The IRS also applies a “mid-month convention,” which means you’re treated as having placed the property in service in the middle of whatever month you actually started renting it. So in the first and last years, your deduction is a partial-year amount based on the month the property was placed in service or taken out of service.
What You Can and Cannot Depreciate
One critical rule: you can only depreciate the building, not the land underneath it. Land doesn’t wear out, so the IRS excludes it entirely. You’ll need to separate the value of the land from the value of the structure when you set up your depreciation. Most landlords use the property tax assessment, which typically breaks out land and improvement values, as a reasonable starting point for this allocation. The proportion from the assessment is then applied to your actual purchase price.
Beyond the building itself, capital improvements you make before or after placing the property in service can also be depreciated. A new roof, an HVAC system, a kitchen renovation, or an added bathroom all qualify. These improvements get their own depreciation schedule, starting in the year you place them in service. Routine repairs and maintenance (fixing a leaky faucet, repainting a room) are different. Those are typically deducted in full in the year you pay for them, not depreciated.
Calculating Your Depreciable Basis
Your depreciable basis is not simply the purchase price. It’s your adjusted basis in the building portion of the property, which includes the purchase price plus certain closing costs and capital improvements, minus the value of the land.
Closing costs that add to your basis include abstract fees, legal fees, recording fees, surveys, transfer taxes, title insurance, and charges for installing utility services. If you agree to pay costs the seller owes, such as back taxes, sales commissions, or recording fees, those count too.
Closing costs you cannot include in your basis are fire insurance premiums, rent for occupying the property before closing, and any costs connected with getting your loan. That means points, loan origination fees, loan assumption fees, credit report fees, and lender-required appraisal fees are all excluded. Escrow deposits for future tax and insurance payments also stay out of your basis.
Here’s a simplified example. Say you buy a rental home for $350,000, with $8,000 in eligible closing costs added to your basis. Your total cost basis is $358,000. The county assessment shows land at 20% of the total value, so you allocate $71,600 to land and $286,400 to the building. Your annual depreciation deduction would be roughly $10,415 ($286,400 divided by 27.5), adjusted for the mid-month convention in the first year.
Capital Improvements Before Renting
If you buy a property and renovate it before placing it in service as a rental, those improvement costs increase your basis. This includes all direct costs like materials and labor (though not your own labor if you do the work yourself). Extending utility service lines, restoring casualty damage, and paying legal fees to defend or perfect the title also increase your basis. Even local improvement assessments, like charges for new streets or sidewalks, get added.
Bonus Depreciation for Property Components
While the building itself must be depreciated over 27.5 or 39 years, certain components inside a rental property can qualify for faster write-offs. Appliances, carpeting, and landscaping, for instance, have shorter recovery periods (typically 5, 7, or 15 years depending on the asset). Some landlords use a strategy called a cost segregation study, where an engineer or tax specialist breaks down a building into its component parts to identify items eligible for accelerated depreciation.
For qualified property acquired after January 19, 2025, 100% bonus depreciation has been permanently restored under the One Big Beautiful Bill Act. This means eligible shorter-life components (not the building structure itself) can potentially be deducted in full in the year they’re placed in service, rather than spread over several years. There’s also an option to elect 40% bonus depreciation instead of 100% if a smaller deduction is more advantageous for your tax situation in a given year.
Why Depreciation Matters at Tax Time
Depreciation is one of the most powerful tax benefits of owning rental property because it creates a deduction without requiring you to write a check. Your property might be holding its value or even appreciating in the real world, but for tax purposes you’re deducting a portion of its cost every year. This can turn a property that produces positive cash flow into one that shows a tax loss on paper, sheltering some or all of your rental income from taxation.
It’s also worth knowing that you don’t get to choose whether to take the depreciation deduction. The IRS requires it. Even if you forget to claim depreciation on your tax return, the IRS will treat you as though you did when you eventually sell. This matters because of depreciation recapture.
Depreciation Recapture When You Sell
When you sell a rental property for more than its depreciated value, you owe tax on the depreciation you claimed (or should have claimed) over the years. This is called depreciation recapture, and it’s taxed at a maximum federal rate of 25% on the portion of your gain attributable to depreciation. This is separate from, and in addition to, any capital gains tax on the remaining profit from the sale.
Here’s how it plays out. Suppose you bought a property with a $286,400 depreciable basis and claimed $104,145 in total depreciation over 10 years. Your adjusted basis in the building is now $182,255. If you sell the entire property for $400,000, the portion of your gain that represents the $104,145 in depreciation you claimed is subject to that 25% recapture rate, potentially costing you up to $26,036 in recapture taxes alone. The rest of your profit is taxed at your applicable long-term capital gains rate.
Some investors defer this tax by using a 1031 exchange, which allows you to roll the proceeds from a sale into a new investment property without triggering an immediate tax bill. The depreciation recapture doesn’t disappear in a 1031 exchange, but it gets postponed until you eventually sell without exchanging into another property.
When Depreciation Begins and Ends
Depreciation starts when your property is “placed in service,” meaning it’s ready and available for rent. That’s not necessarily the day a tenant moves in. If you finish renovations in March and list the property for rent, depreciation starts in March even if the first tenant doesn’t arrive until May.
Depreciation stops when you’ve fully recovered your basis (after 27.5 years for residential property), when you sell or otherwise dispose of the property, or when you permanently take it out of rental service. If you convert a rental back to a personal residence, depreciation ends on the conversion date.