How to calculate rental property depreciation

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 notinclude the costs of obtaining the loan — points, origination, and lender 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 standard method is 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 works too; 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 swingbetween the 20% and 30% assumptions — roughly $220 of real tax annually in a 24% bracket, compounding over the life of the hold. In dense coastal metros the assessor may put land at 40% or more; in much of the Midwest it's 10–15%. 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 — 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 monthafter vacancy, operating expenses, and the mortgage — $2,400 a year of real cash flow (pressure-test your own deal's number with the cash flow calculator). 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 $6,982 of depreciation. Result: $2,400 + $1,900 − $6,982 = −$2,682. The property pays you $2,400 in cash and reports a $2,682 loss to the IRS. In a 24% bracket, the depreciation deduction alone shields about $1,676 a year — roughly $140 a month of after-tax return that never shows up in a cash-on-cash calculation. Whether the paper loss offsets your W-2 income depends on the $25,000 active-participation allowance and its income phase-out — the Schedule E walkthrough traces that exact bridge line by line, and the rental property tax calculator runs the after-tax math on your own numbers.

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 own27.5-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 landscaping over 15. Two practical escape hatches keep small items out of the capitalization maze: the de minimis safe harbor lets you expense items up to $2,500 per invoice line (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 left of bonus depreciation at 20% in 2026, 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, 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. Pull the assessor's actual split for your parcel — it takes five minutes and it's the number that survives scrutiny.
Starting the clock at lease signing. The in-service date is when the unit is ready and advertised, 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.

FAQ

Is taking depreciation on a rental property optional?

No — and this is the single most expensive misunderstanding in rental taxation. The tax code reduces your basis by the depreciation that was allowed or allowable, meaning that when you sell, the IRS computes depreciation recapture as if you had claimed the deduction every year, whether or not you actually did. Skipping depreciation gets you the recapture bill without the annual deductions. If you've owned a rental for years without depreciating it, the fix is IRS Form 3115 (a change in accounting method), which lets you catch up all the missed depreciation in a single year — talk to a CPA, because the catch-up deduction is usually large.

How do I figure out how much of the purchase price is land?

The most common defensible method is the tax assessor's ratio: your county assessment splits the property into land and improvement values, and you apply that same percentage split to your actual purchase basis. If the assessor says the land is $50,000 of a $200,000 total assessment (25%), you treat 25% of your basis as non-depreciable land. Alternatives that also hold up: a line-item land value in your purchase appraisal, or a qualified appraisal done for this purpose. What doesn't hold up is picking a conveniently tiny land percentage with no support — land ratios vary from under 10% in rural markets to 40%+ in expensive coastal metros, and the ratio you use directly scales your deduction.

Which closing costs get added to my depreciable basis?

Costs of acquiring the property are capitalized into basis: title insurance and title search, transfer taxes and recording fees, legal fees, surveys, and most seller-paid items you reimburse. Costs of obtaining the loan are not basis — points, origination fees, and lender fees are amortized separately over the life of the loan. Prepaids and escrows (property tax, insurance) are neither; they're either currently deductible operating expenses or simply deposits. On a typical purchase, capitalizable closing costs add 1.5–3% to your basis, which is real money over 27.5 years — don't leave them out.

What happens to all this depreciation when I sell?

It comes back as depreciation recapture: the portion of your gain created by the basis reduction is taxed at your ordinary rate up to a 25% cap, separately from the long-term capital gains rate on the rest. On a rental that claimed roughly $7,000 a year for ten years, that's about $70,000 of recaptured depreciation and up to $17,500 of tax at sale. Deferral tools exist — a 1031 exchange carries the basis forward, and holding until death steps up basis for heirs — but on an ordinary sale, recapture is part of the exit math and should be underwritten from day one.

The bottom line

Depreciation is three steps of arithmetic sitting on one carefully built number: purchase price plus acquisition costs, minus the assessor's land share, divided by 27.5 — with a mid-month haircut in year one. On the worked duplex that's $6,982 a year, about $1,676 of tax shielded in a 24% bracket, and the difference between a property that pays you $2,400 and one that reports a loss. It's the quietest return stream in the deal, it compounds for the entire hold, and — thanks to allowed-or-allowable — it's the one deduction you can't afford to skip. Underwrite it like the cash flow it effectively is: run the full picture — price, rent, financing, taxes, and the after-tax return — through the TrueCap analyzer before you buy, so the deduction is part of the decision instead of a surprise on your first Schedule E. None of this is tax advice; recovery periods, safe harbors, and passive-loss rules have edge cases — confirm your specific situation with a CPA.