How rental property depreciation works
The IRS lets you deduct the cost of a rental building over its useful life, even though the property may be rising in value. Residential rental property is depreciated over 27.5 years and commercial property over 39 years, using the straight-line method.
Only the building is depreciable — land is not. Your depreciable basis is generally the purchase price plus certain closing costs and capital improvements, minus the value allocated to land. Many investors use the land-to-building ratio from the county property tax assessment to make that split.
Depreciation begins when the property is placed in service (available for rent), not when you buy it, and the first and last years are prorated using the mid-month convention.
Why depreciation matters
Depreciation is a non-cash expense: it reduces taxable rental income without reducing cash flow. On a $300,000 rental with $50,000 of land value, the annual deduction is about $9,091 — which can turn a cash-flowing property into a paper loss for tax purposes.
The deduction is not free forever. When you sell, depreciation you took (or were allowed to take) is generally recaptured and taxed at up to 25%. The capital gains calculator includes recapture, and a 1031 exchange can defer it.
Frequently asked questions
Why 27.5 years?
That is the recovery period the IRS assigns to residential rental property under MACRS. Commercial (nonresidential) real property uses 39 years.
Can I depreciate land?
No. Land is not considered to wear out, so only the building and improvements are depreciable. You must allocate part of the purchase price to land.
What if I don’t claim depreciation?
Recapture at sale is based on depreciation allowed or allowable, so you can owe recapture tax even on depreciation you never claimed. It is usually better to claim it.
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For informational purposes only. Tax rules change and depend on your situation — consult a tax professional or financial advisor before making investment decisions.