Depreciation is a tax deduction that lets you recover the cost of property that wears out over time. For real estate, you deduct the building's cost (not the land) over 27.5 years for residential rentals or 39 years for commercial buildings. It lowers your taxable income even though you don't spend any cash that year.
This content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.
What is depreciation?
When a business buys something that lasts more than a year, like a truck or a building, it usually can't deduct the full cost right away. Instead, the tax code spreads the deduction over the item's "useful life." That yearly deduction is depreciation.
For property owners, depreciation is one of the most valuable tax benefits there is. It's a "paper" expense. You don't write a check for it each year, but it still reduces your taxable rental income.
How does depreciation work for rental property?
The IRS uses a system called MACRS (Modified Accelerated Cost Recovery System). For real estate, the main rules are:
| Property type | Depreciation period | Method |
|---|---|---|
| Residential rental (houses, apartments) | 27.5 years | Straight line |
| Commercial (office, retail, warehouse) | 39 years | Straight line |
| Land improvements (paving, fencing) | 15 years | Accelerated |
| Appliances, carpet, furniture | 5 or 7 years | Accelerated |
| Land | Never | Not depreciable |
Depreciation starts when the property is placed in service, meaning it's ready and available to rent, not when you bought it.
How do I calculate it?
Here's the basic math for a residential rental:
- Start with your cost: purchase price plus certain closing costs. Say $500,000.
- Subtract the land value. Your county assessor's split or an appraisal can help. Say land is $100,000.
- That leaves a $400,000 building basis.
- Divide by 27.5 years: about $14,545 per year.
The first and last years are a little smaller because of the "mid-month convention," which treats property as placed in service in the middle of the month.
Why land doesn't count
Land doesn't wear out, so the IRS doesn't let you depreciate it. This is why the land value you use matters. A higher land value means lower depreciation.
Common depreciation mistakes
- Forgetting to take it. The IRS reduces your basis by depreciation "allowed or allowable," whether you claimed it or not. Skipping it hurts you when you sell.
- Depreciating the land. Always separate land from building.
- Lumping everything into one asset. Appliances, carpet, and parking lots qualify for much shorter lives. A cost segregation study can separate them.
- Not tracking improvements. A new roof or HVAC system is usually depreciated as its own asset.
Missed depreciation? You can fix it
If you've owned a rental for years and never claimed depreciation, or claimed it wrong, you can usually catch up in one year by filing Form 3115 for a change in accounting method. No need to amend old returns in most cases.
What happens when I sell?
Depreciation lowers your basis. When you sell, the gain tied to that depreciation may be taxed through depreciation recapture, at up to 25% for real property and at ordinary rates for personal property. Planning ahead, or using a 1031 exchange, can reduce or delay that tax.
Frequently asked questions
Can I depreciate my primary home?
Is depreciation required?
What form do I use?
See what your property may qualify for
Run our 2-minute STR Qualification Quiz or model your Low / Mid / High cost segregation range.
Related guides
How Cost Segregation Changes Your Depreciation
See how cost segregation moves building costs into 5-, 7-, and 15-year depreciation, and how bonus depreciation turns that into a big first-year deduction.
Read guideAccelerated Depreciation Explained: Methods, Pros, and Cons
Accelerated depreciation lets you deduct more of an asset's cost early. Learn the main methods, how they compare to straight-line, and when it makes sense.
Read guideDepreciation Recapture: What It Is and How to Plan for It
Depreciation recapture taxes back some depreciation when you sell. Learn the 25% and ordinary rates, see an example, and explore ways to reduce or defer it.
Read guideForm 3115 for Cost Segregation: Catch Up Missed Depreciation Without Amending
Form 3115 lets you claim years of missed depreciation in one year, without amending returns. Learn how it works with look-back cost segregation studies.
Read guideThis content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.