Rental Property Depreciation: How to Calculate It and Save on Taxes

Depreciation is the largest non-cash deduction on most rental returns and the most-missed by self-filers. Below: the 27.5-year straight-line basics, the cost-basis math, the bonus depreciation calculation, and a worked example a CPA wouldn't redline.

Most landlords know depreciation exists. Far fewer calculate it correctly. The result is either an overstated tax bill (you skipped the deduction) or an understated one (you applied it to land, or the wrong basis). Both are fixable. Here's the mechanics.

What depreciation is (27.5-year straight-line)

Depreciation lets you deduct the cost of a rental building over its useful life — even if the property is appreciating in market value. The IRS decided that residential rental real property wears out over 27.5 years. That's the number you'll see on every Schedule E tax prep guide, and it doesn't change regardless of when you bought or how long you plan to hold.

The method is straight-line: same deduction every year for 27.5 years. No accelerated rate for the base building. This distinguishes it from bonus depreciation and cost segregation, which apply to specific components inside the building (more on those below).

A few clarifying rules that trip up self-filers:

Only the improvements depreciate — not the land. Land doesn't wear out, so the IRS doesn't let you depreciate it. If you include land value in your basis, you'll overclaim and face recapture on sale.
You start depreciation in the month the property is placed in service, not the month you bought it or signed the lease. "Placed in service" means ready and available for rent — even if you don't have a tenant yet.
Mid-month convention applies in year 1. For residential property, you use the mid-month convention: the property is treated as placed in service in the middle of the month you actually put it in service. This affects your Year 1 deduction.
You must take depreciation even if you don't claim it. The IRS applies depreciation recapture tax based on the depreciation you were allowed to take, not just what you actually took. Self-filers who skipped depreciation get no grace — they still owe recapture tax on it.

If you inherited a property or received it as a gift, your depreciable basis is typically the fair market value at the time of transfer (or carryover basis for gifts), not the original purchase price. That's a different calculation entirely, worth a conversation with a CPA.

How to calculate it

The formula is straightforward:

Annual depreciation = Depreciable basis ÷ 27.5

Where depreciable basis = your cost basis minus the value allocated to land.

Example: You bought a duplex for $400,000. After allocating $60,000 to land (more on this below), your depreciable basis is $340,000.

$340,000 ÷ 27.5 = $12,364 per year

That's your annual depreciation deduction on Form 4562, which flows to Schedule E.

In the first year, apply the mid-month convention. If you placed the property in service in July (month 7), you get credit for 5.5 months out of 12:

$12,364 × (5.5 ÷ 12) = $5,667 for Year 1

From Year 2 through Year 27, you take the full $12,364. In Year 28, you take the remaining partial year.

The calculation gets slightly more complex if you made significant improvements after purchase — those improvements start a new 27.5-year clock at their own cost basis, separate from the original building depreciation. Track improvements and their dates separately.

Cost basis: what's included

Your cost basis is the starting point for the depreciation calculation. It's not just the purchase price. It includes:

Purchase price (what you paid for the property)
Closing costs you paid as the buyer: title insurance, recording fees, transfer taxes, attorney fees, survey costs, loan origination fees (partially — points are usually amortized separately), appraisal fees, and inspection fees
Capital improvements made before placing in service (e.g., you bought a fixer-upper and spent $40,000 on rehab before renting it)
Legal fees related to acquiring the property

What's not included in your depreciable basis:

Mortgage principal and interest (these are deducted separately as interest expense)
Homeowner's association dues and property taxes (deductible as operating expenses, not basis)
Routine repairs after the property is in service
Points paid on a mortgage (amortized over the loan life, not depreciated)

One common error: landlords who converted a personal residence to a rental property have a more complex basis calculation. Your depreciable basis is the lower of (a) your adjusted cost basis at the time of conversion, or (b) the fair market value at the time of conversion. If your house appreciated significantly, you lose the step-up. If it depreciated, you can't claim the loss on depreciation recapture later.

Land vs improvements split

Since land isn't depreciable, you need to separate your total purchase price between land and improvements. There's no universal formula — you allocate based on reasonable evidence. Three methods work:

1. County assessor's allocation. Most property tax bills break assessed value into land and improvements. Use that ratio. If the county says land = 20% and improvements = 80%, apply that to your purchase price. This is the most common approach and generally IRS-defensible.

2. Independent appraisal. If you had a lender appraisal at purchase, it often includes a land value estimate. Use that.

3. Cost segregation study. A more precise (and expensive) approach used for larger properties, which also identifies shorter-life components (see next section).

Be conservative with the land allocation. Understating land value inflates your depreciable basis and your annual deduction — which the IRS can recapture on sale with interest and penalties. Overstating land value costs you current deductions. The assessor's ratio is a defensible middle ground for most investors.

For raw land you intend to build on, there is no depreciation at all until construction is complete and the structure is placed in service.

Bonus depreciation and cost segregation (when worth it)

Bonus depreciation applies to certain personal property components inside a rental building — not the building itself. The IRS defines these as assets with a class life of 20 years or less: appliances, carpet, certain fixtures, land improvements (parking lots, landscaping, fencing), and similar items.

Bonus depreciation rates have been phasing down under the Tax Cuts and Jobs Act:

2022: 100%
2023: 80%
2024: 60%
2025: 40%
2026: 20%
2027 and beyond: 0% (unless Congress acts)

At 20% in 2026, bonus depreciation is less dramatic than it was at 100% — but still meaningful on a large capital purchase. If you replaced appliances and flooring in multiple units ($30,000 total), you can deduct $6,000 in Year 1 via bonus depreciation instead of spreading it over 5–7 years.

Cost segregation is the process of professionally reclassifying building components into shorter-life categories to accelerate depreciation. A qualified engineer or cost segregation firm inspects the property and identifies which components (electrical systems, plumbing, specialty finishes) can be classified as 5-year, 7-year, or 15-year property rather than the full 27.5-year building category.

When does it make sense? The general rule:

Properties valued at $500,000+ tend to justify the $5,000–$15,000 study cost
High-income investors who need losses in the current year
Properties with significant improvements or specialized tenant build-outs

Cost segregation doesn't eliminate tax — it defers it. You'll face recapture on the accelerated portions when you sell, at up to 25% for unrecaptured Section 1250 gain.

Recapture on sale

When you sell a rental property, the IRS recaptures the depreciation you took (or were allowed to take). This is called depreciation recapture, taxed at a maximum rate of 25% (the Section 1250 unrecaptured gain rate) — higher than the long-term capital gains rate most investors expect.

The recapture amount is the total depreciation claimed over your holding period, up to the gain on sale. If you sell for a loss, there's no recapture — but there often isn't a capital gain either.

Example: You bought for $400,000 (depreciable basis $340,000), held for 10 years, and claimed $123,636 in total depreciation. You sell for $550,000. Your adjusted basis is $400,000 − $123,636 = $276,364. Total gain = $273,636. Of that, $123,636 is taxed at up to 25% (recapture). The remaining $150,000 is taxed at your long-term capital gains rate (0%, 15%, or 20%).

Strategies to manage recapture:

1031 exchange: defer all taxes (capital gains + recapture) by rolling proceeds into a like-kind replacement property
Installment sale: spread gain recognition over multiple years
Hold until death: heirs get a stepped-up basis, eliminating depreciation recapture

Recapture is one reason selling is more expensive than it looks on paper. Model it before you agree to a sales price.

Worked example

Property: Single-family rental in Phoenix, AZ Purchase price: $385,000 (closed March 2024, placed in service April 2024) Closing costs: $9,500 (buyer's side) Total cost basis: $394,500 County assessor land/improvement split: 18% land / 82% improvements

Step 1 — Land allocation: $394,500 × 18% = $71,010 (land, not depreciable) Step 2 — Depreciable basis: $394,500 − $71,010 = $323,490 Step 3 — Annual depreciation: $323,490 ÷ 27.5 = $11,763/year Step 4 — Year 1 (mid-month convention): Placed in service in April (month 4). Months remaining including mid-month = 8.5. $11,763 × (8.5 ÷ 12) = $8,332 for 2024

Additional components (new appliances purchased at acquisition, $8,500):

5-year property, eligible for 2026 bonus depreciation at 20%: $8,500 × 20% = $1,700 in Year 1 via bonus; remaining $6,800 depreciated over 5 years

Total first-year depreciation: $8,332 (building) + $1,700 (bonus on appliances) + $1,360 (regular depreciation on remaining appliance basis) = ~$11,392

At a 32% marginal rate, that first-year depreciation generates approximately $3,645 in tax savings — more than a month's rent on most properties.

This is the number most self-filers miss entirely. It shows up on Form 4562 and flows to Schedule E Line 18. If your tax software isn't populating it, check your asset list in the depreciation section.

For more on how depreciation interacts with your choice of tax schedule, see our guide on Schedule E vs Schedule C for rental income. And for how the CapEx/repair distinction affects what qualifies for cost segregation, see CapEx vs repairs: what's deductible.

FAQ

Can I depreciate a property I haven't rented yet? Only once it's placed in service — meaning it's available for rent. If you bought in January and didn't have a tenant until June but the unit was listed and ready, April could be your placed-in-service date. Document availability (listing ads, ad dates) to support whatever month you claim.

What if I didn't take depreciation in prior years? You can file Form 3115 (Application for Change in Accounting Method) to catch up all missed depreciation at once. This is a non-automatic change but it's commonly approved. A CPA familiar with rental real estate can handle the filing — it's worth doing because the IRS will assess recapture on missed depreciation at sale regardless.

Does depreciation affect my passive activity losses? Yes. Depreciation creates or deepens a paper loss on Schedule E. If your adjusted gross income (AGI) is under $100,000 and you actively participate in the rental, you can deduct up to $25,000 of rental losses against ordinary income. This phases out between $100,000 and $150,000 AGI. Above $150,000, losses are suspended unless you qualify as a real estate professional (750 hours/year, more than half your working time in real property trades).

Should I do a cost segregation study on a $250,000 property? Probably not. Study costs run $4,000–$15,000 depending on property complexity. On a $250,000 property with, say, $30,000 in reclassifiable components, the present-value benefit of accelerated depreciation is unlikely to exceed the study cost — particularly now that bonus depreciation is at 20% and dropping. The math changes for portfolios of similar properties where one study's methodology can be applied across multiple assets.

Is land ever depreciable? No. The IRS position is unambiguous — land has no determinable useful life and is not depreciable. Temporary improvements to land (e.g., landscaping, parking lot) may be classified as 15-year land improvement property, which is depreciable and potentially eligible for bonus depreciation.

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This isn't tax advice. Talk to a CPA who works with rental real estate before acting on anything here.