How to calculate depreciation on a rental property: the 27.5-year math, step by step (2026)

What depreciation actually is (and why 27.5 years)

The tax code treats a rental building as a machine that wears out: you bought an income-producing asset with a finite life, so you deduct its cost gradually over that life instead of all at once. For residential rental property, Congress set that life at 27.5 years, recovered on a straight line — roughly 3.636% of the building's cost every year. Two things in the purchase never depreciate: the land (dirt doesn't wear out, in the IRS's view) and your own labor. Everything else about the deduction follows from one number, the depreciable basis — so that's where the math starts. Get basis right and the rest is division; get it wrong and every year of the schedule inherits the error.

Step 1 — build the depreciable basis

Basis starts with the purchase price and adds the costs of acquiring the property: title insurance, transfer taxes, recording and legal fees, survey costs. It does not include most costs of obtaining the loan — points and origination fees amortize separately over the loan term — and it doesn't include prepaid taxes or insurance escrows, which are operating items. (The closing costs breakdown sorts every line on the settlement statement into these buckets.) Concretely: you buy a duplex for $250,000 and your capitalizable closing costs — title, transfer tax, legal, recording — come to $6,000. Your total basis is $256,000. Investors who skip this step and depreciate the bare purchase price donate the deduction on that $6,000 — about $218 a year, every year, for 27.5 years.

Step 2 — carve out the land

Only the building depreciates, so you need a defensible split between land and improvements. The IRS starts from the fair market values of land and building; if you aren't certain of those, Publication 527 lets you use the tax assessor's ratio: your county already splits its assessment into land and improvement values, and you apply that percentage to your actual basis. Say the assessment shows land at $50,000 of a $200,000 total — 25% land. Applied to the $256,000 basis: $64,000 of land, and a depreciable building basis of $192,000. An appraisal with a line-item land value gives you the fair market values directly; picking a flattering number with no support does not.

The ratio matters more than most investors realize, because it scales the deduction linearly for three decades. At 20% land, the building basis is $204,800 and the annual deduction $7,447; at 25%, $192,000 and $6,982; at 30%, $179,200 and $6,516. That's a $931-a-year swing between the 20% and 30% assumptions — roughly $220 a year at an assumed 24% rate, before the loss limits covered below, for every year of the hold. In expensive markets the assessor may put land at a large share of value; an FHFA staff working paper using 2012–2019 appraisals found county land shares from about 8% at the 1st percentile to about 54% at the 99th. Use your parcel's actual ratio, not a rule of thumb.

Step 3 — divide by 27.5 (and the mid-month convention)

From year two onward the math is one line: $192,000 ÷ 27.5 = $6,982 a year — $582 a month of deduction for owning the same building. Year one is smaller, because residential rental uses the mid-month convention: the property is treated as placed in service at the midpoint of the month it was ready and available to rent, no matter the actual day. Place the duplex in service in March and year one counts 9.5 months: $192,000 × 3.636% × 9.5/12 ≈ $5,528. A January start yields about $6,691; a December closing gets half a month, about $291. Note the trigger is ready and available for rent — for example, the day the unit is habitable and listed, not the day a lease starts. If you close in October and advertise in November, depreciation starts in November even if the tenant moves in come January.

What it does to your taxes: the paper-loss bridge

Now follow the number through the return. Suppose the duplex, financed with 25% down at 7%, clears about +$200 a month after vacancy, operating expenses, and the mortgage — $2,400 a year of real cash flow (pressure-test your own deal's number in the TrueCap analyzer). Taxable income is a different animal: start from cash flow, add back the ~$1,900 of year-one principal paydown (cash out the door, but not deductible), then subtract a full year's $6,982 of depreciation (year one's is smaller under the mid-month convention; a full year keeps the arithmetic simple). Result: $2,400 + $1,900 − $6,982 = −$2,682. The property pays you $2,400 in cash and reports a $2,682 modeled loss before applying taxpayer-level limitations. Multiplying the $6,982 deduction by an assumed 24% rate produces $1,676, but that is only a rate sensitivity—not a current tax-saving estimate. Whether any loss is usable now depends on passive-activity, basis, at-risk, personal-use, and other rules. The Schedule E walkthrough traces that bridge line by line; a qualified adviser can apply it to your return and holding structure.

Improvements, repairs, and the shorter schedules

The 27.5-year clock covers what you bought. What you spend afterward splits three ways. Repairs — fixing what broke, at comparable quality — deduct in full the year you pay them. Improvements — a new roof, an addition, a full kitchen renovation — are capitalized and start their own 27.5-year schedules from their in-service dates: a $12,000 roof in year three adds $436 a year, on its own clock, alongside the building's. And some components aren't 27.5-year property at all: appliances, carpet, and furniture recover over 5 years; fences, driveways, and depreciable shrubbery over 15 (general landscaping is usually part of the land's nondepreciable cost). Two practical escape hatches keep small items out of the capitalization maze: the de minimis safe harbor, if you elect it, lets you expense items up to $2,500 per invoice or item (a $1,800 fridge is a same-year deduction, not a 5-year schedule), and those shorter-life components are exactly what a cost segregation study accelerates — the strategy, and what's restored 100% bonus deduction for qualifying property acquired and placed in service after January 19, 2025, is covered in the bonus depreciation guide.

The allowed-or-allowable trap

Here's the part that makes depreciation mandatory in everything but name: when you sell, the IRS reduces your basis by the depreciation that was allowed or allowable — the deductions you were entitled to, whether or not you claimed them. Skip depreciation for ten years on the duplex and you still owe depreciation recapture — at up to 25% — on roughly $70,000 of deductions you never took. Worst of both worlds: no annual benefit, full exit bill. If you've been under-claiming, the repair is Form 3115 (if the under-claiming spans two or more consecutive returns; a single year is fixed on an amended return), a change in accounting method that catches up all missed depreciation as a single deduction in the current year — one of the few genuinely retroactive fixes in the tax code, and well worth a CPA's fee. The same logic means depreciation belongs in your underwriting from day one: it's a real return stream while you hold and a real liability when you exit, and deals should be compared with both sides priced in. (Depreciation is also just one of the fourteen deductions on the schedule — the full deduction list covers the rest.)

Five mistakes investors make with depreciation

• Depreciating the purchase price instead of the basis. Leaving out capitalizable closing costs forfeits real deductions; leaving in the land invites an audit adjustment. Build basis first, split second.
• Guessing the land ratio. A 20%-vs-30% land assumption moves the deduction $931 a year on this duplex. Use an appraisal's land value, or the assessor's actual split for your parcel if you don't have one — either gives you a number you can support.
• Starting the clock at lease signing. The in-service date is when the unit is ready and available for rent (listing it for rent is one way to show that), not when rent starts flowing. A November listing with a January move-in is two extra months of deduction.
• Capitalizing repairs (or expensing improvements). A $400 water heater repair is a same-year deduction; a $12,000 roof is a 27.5-year asset. Misclassifying in either direction misstates income — and the de minimis safe harbor exists precisely so small items stay simple.
• Skipping depreciation to "avoid recapture later." Recapture is computed on allowed or allowable depreciation — you pay it either way. Not claiming the deduction is pure loss.