How to Calculate Depreciation on a Rental Property
Short answer: Residential rental property is depreciated over 27.5 years using the straight-line method. Take your depreciable basis (purchase price plus certain closing costs and improvements, minus land value) and divide by 27.5. A building with a $280,000 basis gives an annual deduction of about $10,182.
- Only the building is depreciable, never the land.
- Residential rentals use 27.5 years; commercial property uses 39 years.
- The first year is prorated with the mid-month convention, based on the month the property is placed in service.
- Depreciation lowers your taxes each year, but is generally recaptured when you sell.
Step 1: Work out your depreciable basis
Your depreciable basis is the amount you are allowed to deduct over the property’s life. For most rentals it is:
Depreciable basis = purchase price + certain closing costs + capital improvements − land value
Closing costs that can usually be added to basis include title insurance, recording fees, transfer taxes, legal fees and survey costs. Costs tied to getting the loan, such as points and loan origination fees, are generally not added to basis; they are amortized separately over the life of the loan.
Capital improvements made before or after you start renting (a new roof, an addition, a full kitchen remodel) also add to basis. Routine repairs do not; they are deducted in the year you pay for them.
Step 2: Subtract the land value
Land does not wear out, so the IRS does not let you depreciate it. You have to split the purchase price between land and building. Common ways to do this:
- Use the ratio on your county property tax assessment. If the assessor values the land at 20% of the total, allocate 20% of your purchase price to land.
- Use an appraisal that values the land separately.
- Use a recent comparable sale of a vacant lot nearby.
The land share varies a lot by location: it can be 10% in some rural areas and well over 50% in expensive cities. Using a reasonable, documented method matters more than finding a precise number.
Step 3: Divide by 27.5 years
Residential rental property (houses, condos, duplexes and apartment buildings where at least 80% of the income comes from dwelling units) is depreciated over 27.5 years using the straight-line method under MACRS. Commercial (nonresidential) property uses 39 years.
Annual depreciation = depreciable basis ÷ 27.5
Step 4: Prorate the first year (mid-month convention)
Depreciation starts when the property is placed in service: the date it is ready and available for rent, not the date you closed. Under the mid-month convention, the property is treated as placed in service in the middle of that month, so in the first year you get:
First-year fraction = (12.5 − month placed in service) ÷ 12
For a property placed in service in March (month 3), that is 9.5 ÷ 12, or about 79% of a full year. The rest of that year’s deduction is taken in the final year of the schedule.
Worked example
You buy a single-family rental for $350,000. The county assessment allocates 20% of the value to land, so $70,000 is land. The home is ready to rent in March.
| Item | Amount |
|---|---|
| Purchase price | $350,000 |
| Less land value (20%) | −$70,000 |
| Depreciable basis | $280,000 |
| Annual depreciation ($280,000 ÷ 27.5) | $10,181.82 |
| Monthly equivalent | $848.48 |
| First year (March: 9.5 ÷ 12 of a year) | $8,060.61 |
| Annual tax saving at a 24% tax rate | ≈ $2,444 |
Over the full schedule you deduct the entire $280,000: a partial first year, 26 full years, and a final partial year of $7,212.12, for 28 tax years in all for a March start.
What happens when you sell
Depreciation reduces your cost basis. When you sell, the part of your gain that comes from depreciation is “unrecaptured Section 1250 gain,” taxed at your ordinary rate but no more than 25%, which is usually higher than the long-term capital gains rate. See our guide to depreciation recapture for how that works.
Recapture is based on the depreciation you were allowed to take, even if you didn’t claim it. Skipping depreciation doesn’t avoid recapture; it just means you lose the deduction. If you missed it in past years, a tax professional can usually catch you up with Form 3115 rather than amending old returns.
Frequently asked questions
Can I depreciate a rental property I bought years ago but never depreciated?
Yes. You generally claim the missed depreciation with an accounting method change (Form 3115) instead of amending each prior return. Because recapture applies to depreciation allowed or allowable, it is usually worth catching up. Ask a tax professional to file it.
Do I depreciate the full purchase price?
No. Subtract the value of the land, and add qualifying closing costs and capital improvements. Only the building and improvements are depreciable.
When does depreciation start?
When the property is placed in service (ready and available for rent), not when you buy it. If you renovate for three months first, depreciation starts when the renovation is done and the property is listed.
Can I depreciate faster than 27.5 years?
Some components, such as appliances, carpeting and land improvements, can be depreciated over 5, 7 or 15 years. A cost segregation study identifies these and front-loads deductions. It is most common on larger or more expensive properties.
More guides
This guide explains general federal tax rules for educational purposes and is not tax, legal or financial advice. Rules change and depend on your situation. Consult a qualified tax professional before acting.