Rental property depreciation lets an owner deduct the cost of a qualifying rental building over time. To calculate it, first determine the building’s depreciable basis by separating its value from the value of the land. For many U.S. residential rentals, divide that building basis by 27.5 years to estimate a full year’s deduction under the general depreciation system (GDS). The first and last years require a different calculation because the IRS uses a mid-month convention.
This guide explains the steps, shows an example, and covers situations that often change the calculation. It addresses U.S. federal tax rules for residential rental property; your specific deduction depends on the property and your tax circumstances.
What Is Rental Property Depreciation?
Depreciation is a way to recover the cost of property used to produce rental income over a set period. The building can generally be depreciated, but the land cannot. Certain improvements and items such as appliances may also be depreciable, sometimes under different rules from the building.
Depreciation is a tax deduction rather than a cash payment. It may reduce taxable rental income, but it does not increase the rent you collect or guarantee a particular tax saving.
How to Calculate Rental Property Depreciation
- Determine your basis. For a purchased property, start with its cost and account for any amounts that tax rules require you to add to or subtract from that cost. The purchase price alone is not always the final basis.
- Separate land from the building. Use a reasonable, documented allocation. Only the building portion is included in the building’s depreciable basis.
- Identify when the property was placed in service. This is generally when it was ready and available to rent, even if a tenant moved in later.
- Identify the applicable depreciation system and recovery period. Residential rental buildings commonly use a 27.5-year recovery period under GDS. Different rules may apply if the alternative depreciation system (ADS) is required or elected.
- Calculate the deduction for the tax year. Dividing the building’s depreciable basis by 27.5 gives an estimate for a full year under GDS. Use the applicable IRS depreciation table or convention for the year the property is placed in service and the year it is disposed of.
Example: A full year of depreciation
Suppose you purchase a rental property with a total basis of $350,000. After a supported allocation, $75,000 is assigned to land and $275,000 to the building. The land is excluded, leaving a building basis of $275,000.
$275,000 ÷ 27.5 years = $10,000
Under GDS, $10,000 is the estimated building depreciation for a full year. This example assumes the entire building qualifies as residential rental property and does not include separately depreciated assets, later improvements, or other adjustments.
Why the first year is different
Residential rental buildings use the mid-month convention. If a building is placed in service during July, the IRS treats it as placed in service in the middle of July for depreciation purposes, regardless of the exact day. You therefore cannot simply claim a full $10,000 for that first calendar year in the example above. The IRS depreciation tables account for this convention and provide the percentage to use for the applicable month and year.
When Does Depreciation Begin?
Depreciation generally begins when the property is ready and available for rent, not necessarily on the closing date or the date the first tenant pays rent. For example, a house that is ready and advertised for rent may be placed in service before a tenant moves in. A house still undergoing work needed to make it rentable generally has not yet reached that point.
Keep records showing when the property became available, such as listing dates, photographs, invoices, and lease documents. Depreciation generally ends when you dispose of the property or permanently withdraw it from rental use, or when its depreciable basis has been recovered.
Do Improvements and Appliances Follow the Same Schedule?
Not always. A capital improvement to a rental building, such as a qualifying new roof, is generally treated as a separate depreciable item with its own placed-in-service date. It does not restart the original building’s depreciation schedule. An improvement to a residential rental building generally follows the recovery period that would apply to that building when the improvement is placed in service.
Appliances, furniture, and some other assets may have different recovery periods and conventions. Repairs and maintenance may also be treated differently from improvements. Because the distinction affects when a cost can be deducted, record what work was done and retain the related invoices.
What If You Convert Your Home Into a Rental?
A former personal residence has a special basis rule. For depreciation, compare the property’s adjusted basis with its fair market value on the date you convert it to rental use. Generally, the lower amount is used as the starting point for depreciation. Then separate the land value, because land is not depreciable.
This is different from simply using the original purchase price. Improvements and other basis adjustments made while you owned the home may affect its adjusted basis. A conversion can also raise separate questions about how gain or loss is calculated if you eventually sell, so keep records of both figures.
Does Depreciation Always Lower Your Taxes?
Depreciation can reduce the income reported from a rental activity without requiring a new cash expense in that year. However, the tax benefit depends on your full return. Passive activity loss rules and other limitations can affect whether a rental loss reduces other income now or is carried forward.
Depreciation also reduces the property’s adjusted basis. That can affect the gain calculated when you sell. The IRS generally requires basis to be reduced by depreciation that was allowed or allowable, even if you did not claim the full amount available. Accurate annual records matter for both current returns and a future sale.
What Happens to Depreciation When You Sell?
When you sell a rental property, prior depreciation can increase the taxable gain because it reduced your adjusted basis. Some gain attributable to depreciation may be treated as unrecaptured section 1250 gain, which can have a federal tax rate of up to 25%, depending on your circumstances. Other rules may apply to separately depreciated assets.
This is more precise than saying you automatically “pay back” every depreciation deduction at a flat 25% rate. The tax result depends on your basis, sale price, selling costs, depreciation history, and other tax facts. Have a qualified tax professional review the numbers before estimating sale proceeds.
Common Rental Property Depreciation Mistakes
- Including the value of land in the building’s depreciable basis.
- Claiming a full year’s building depreciation in the first year without applying the mid-month convention.
- Using the purchase date instead of the date the property was ready and available to rent.
- Adding a later improvement to the original building schedule instead of evaluating it separately.
- Treating every repair, appliance, and building improvement as if it follows the same 27.5-year schedule.
- Using the original purchase price alone when converting a personal residence to a rental.
- Forgetting that depreciation affects the property’s adjusted basis and potential tax on sale.
Frequently Asked Questions
Can I depreciate a rental property before I find a tenant?
Potentially, yes. The key question is whether it has been placed in service—generally, whether it is ready and available for rent. The first tenant’s move-in date is not always the start date.
Can I depreciate the land?
No. Land is not depreciable. Allocate the property’s basis between land and depreciable improvements using a reasonable method and keep documentation supporting that allocation.
Is rental property depreciation always calculated over 27.5 years?
No. The 27.5-year GDS recovery period applies to qualifying residential rental buildings. ADS, nonresidential property, appliances, furniture, and certain other assets can follow different rules. For residential rental property placed in service after December 31, 2017, the ADS recovery period is generally 30 years; older property can have different ADS treatment.
Should I skip depreciation to avoid tax when I sell?
Simply skipping an available deduction generally does not avoid its effect on basis: IRS rules account for depreciation allowed or allowable. Ask a tax professional how to correct depreciation that was missed or calculated incorrectly.
Keep the Calculation and Records Together
For each rental building or separately depreciated improvement, keep its basis calculation, land allocation, placed-in-service date, applicable method, annual depreciation, and supporting documents. These records make it easier to prepare annual returns and calculate adjusted basis if you sell.
For the detailed federal rules and depreciation tables, see IRS Publication 527: Residential Rental Property. For rules that may affect gain on sale, see IRS Publication 544: Sales and Other Dispositions of Assets. A qualified tax professional can apply those rules to your property and return.
