How depreciation on rental property works
Depreciation on rental property lets you deduct the cost of a residential rental building over 27.5 years, using the straight-line method and the mid-month convention required by IRS Publication 527. Land is never depreciated, so only the building and its improvements count.
The deduction is a paper expense. You don’t write a check for it, yet it lowers taxable rental income each year. A rental that brings in $6,000 of cash after expenses can show a much smaller profit, or a loss, on Schedule E once depreciation is taken.
The trade comes later. Every dollar of depreciation lowers your basis, which raises your gain when you sell, and that part of the gain is taxed at up to 25%. Depreciation mostly moves tax from the years you own the property to the year you sell it, unless you defer the gain further with a 1031 exchange or hold the property until death.
How to calculate depreciation on rental property
To calculate depreciation on rental property, multiply the building’s depreciable basis by the IRS percentage for the year and the month it was placed in service. In a full year that percentage is 3.636%, which is 1 divided by 27.5. The steps below are how you figure it out for any residential rental.
- Start with your cost: the purchase price plus settlement costs that IRS Publication 551 lets you add to basis, such as title insurance, recording fees, transfer taxes, legal fees and surveys.
- Subtract the land. Split the total between land and building using an appraisal or the county’s assessed values.
- Find the placed-in-service month. Depreciation starts when the unit is ready and available to rent, even if no tenant has moved in yet.
- Look up the first-year rate in Table 2-2d of Publication 527 for that month and multiply it by the building basis.
- Use 3.636% for each full year after that until the basis is used up, which takes 28 or 29 calendar years because of the partial first and last years.
- Depreciate each later improvement as its own asset, with its own start date and recovery period.
- Report it on Form 4562 in the first year and on Schedule E each year after that.
Separating land value from the building
You must split your cost between land and building because land does not wear out and cannot be depreciated. The IRS lets you divide the cost using fair market values or, if you are unsure of those, the assessed values on your property tax bill.
Publication 527 gives an example. A house and lot cost $200,000. The county assessed the property at $160,000, with $136,000 of that for the house. The owner allocates 85% ($136,000 ÷ $160,000) of the price to the building, or $170,000, and $30,000 to the land.
The assessor’s ratio is the most common method because it is public and easy to document. It isn’t always the most favorable. In expensive coastal markets, assessors often assign 40% or more of a value to land. A residential appraisal that breaks out land value, or a cost segregation study for a larger building, can support a different split if it reflects the real market. Whatever you use, keep the document in your file. Land allocation is one of the first things an examiner checks.
A condo works the same way, but the land share is usually small because you own a fraction of a shared lot. For a small apartment building, ask the appraiser hired for your loan to state the land value separately. It costs little extra and gives you a defensible number.
The 27.5-year rule and the mid-month convention
Residential rental property is depreciated over 27.5 years under the General Depreciation System, and the mid-month convention treats every building as placed in service in the middle of its month. A building that becomes ready to rent on April 2 and one ready on April 29 get the same first-year deduction: 8.5 months out of 12.
A property counts as residential rental property when at least 80% of its gross rent comes from dwelling units. Houses, duplexes, condos and apartment buildings normally qualify. Hotels and other transient lodging don’t, and commercial buildings use 39 years instead.
The first-year percentages below come from Table 2-2d of IRS Publication 527 (2025). Each one already includes the half-month adjustment, so you multiply it straight against the building basis.
| Month placed in service | Year 1 rate | Year 1 deduction per $100,000 of building basis |
|---|---|---|
| January | 3.485% | $3,485 |
| February | 3.182% | $3,182 |
| March | 2.879% | $2,879 |
| April | 2.576% | $2,576 |
| May | 2.273% | $2,273 |
| June | 1.970% | $1,970 |
| July | 1.667% | $1,667 |
| August | 1.364% | $1,364 |
| September | 1.061% | $1,061 |
| October | 0.758% | $758 |
| November | 0.455% | $455 |
| December | 0.152% | $152 |
| Each full year after year 1 | 3.636% | $3,636 |
How the mid-month convention works in the year you sell
The same convention applies at the end. In the year you sell or stop renting, you treat the property as leaving service in the middle of that month. Take the full-year amount, multiply by the number of months before the sale month, add a half month, and divide by 12.
Selling in June means 5.5 months of depreciation that year. If the full-year deduction is $12,435, the final-year deduction is $12,435 × 5.5 ÷ 12, or about $5,699. Later years in the IRS table alternate between 3.636% and 3.637% to absorb rounding, so a spreadsheet using 1/27.5 may differ from the table by a few dollars.
Worked example: depreciation calculation for a rental property
Here is a full depreciation calculation for a single-family rental, from purchase to sale.
An investor buys a rental house for $450,000 and pays $6,000 of closing costs that go into basis, for a total cost of $456,000. The county assessment shows $90,000 for land and $270,000 for improvements, so 75% of the cost is building. Depreciable building basis is $342,000, and $114,000 is land.
The house is ready to rent in April 2026. Year 1 depreciation is $342,000 × 2.576%, or $8,810. From 2027 on, it is $342,000 × 3.636%, or $12,435 a year.
In August 2028, the investor replaces the roof for $24,000. That is an improvement, so it gets its own 27.5-year schedule starting in August: $24,000 × 1.364% = $327 for 2028, then $873 a year.
The investor sells in June 2033. Building depreciation for 2033 is about $5,699 and the roof’s is about $400.
| Item | Amount |
|---|---|
| Total cost (price plus basis closing costs) | $456,000 |
| Land (25%, not depreciable) | $114,000 |
| Building basis (75%) | $342,000 |
| 2026 building deduction (April, 2.576%) | $8,810 |
| 2027 to 2032 building deduction (3.636% each year) | $12,435 a year, $74,610 total |
| 2033 building deduction (5.5 months) | $5,699 |
| Roof improvement, August 2028 to June 2033 | $4,219 |
| Total depreciation claimed | $93,338 |
What counts in your depreciable basis
Your depreciable basis is generally what you paid for the building, plus certain closing costs, plus improvements, minus the land. Basis is not the same as the loan amount. A $450,000 house bought with $90,000 down still has a $450,000 cost basis before land is removed.
Some closing costs go into basis and some don’t. Recording fees, title insurance, transfer taxes, legal fees, surveys and any back taxes you agree to pay for the seller are added. Loan costs such as points and appraisal fees required by the lender are not part of the property’s basis; they are amortized over the life of the loan. Property tax and insurance prorations at closing are expenses of the year, not basis.
A home you move out of and start renting follows a different rule. Its basis for depreciation is the lower of your adjusted basis or its fair market value on the date you convert it to a rental, per Publication 527. If the house has lost value since you bought it, you depreciate from the lower market value.
Inherited rental property generally takes a basis equal to its fair market value on the date of death, and depreciation starts fresh from that new basis on a new 27.5-year schedule.
Depreciating improvements vs deducting repairs
An improvement is depreciated over the recovery period that applies to the property it improves, while a repair is deducted in the year you pay for it. For a rental building, an improvement to the structure or its systems (roof, HVAC, plumbing, electrical, windows) is depreciated over 27.5 years starting the month it is placed in service.
The IRS tangible property regulations decide which is which. A cost is an improvement if it is a betterment (fixes a defect that existed at purchase, adds capacity or materially improves quality), a restoration (replaces a major component or rebuilds the property to like-new condition) or an adaptation to a new use. Patching a section of roof is a repair. Replacing the whole roof is an improvement.
Three safe harbors let you deduct costs that might otherwise be capitalized. They are elections, so your preparer has to make them on the return.
| Safe harbor | What it allows | Limit |
|---|---|---|
| De minimis | Deduct low-cost items such as a refrigerator or water heater instead of depreciating them | $2,500 per invoice or item for taxpayers without an audited financial statement |
| Routine maintenance | Deduct recurring work that keeps a building system running, such as servicing HVAC | Work you expect to do more than once in the 10 years after the system is placed in service |
| Small taxpayer (buildings) | Deduct all repairs, maintenance and improvements on one building for the year | Gross receipts of $10 million or less, building basis of $1 million or less, and yearly costs no more than the lesser of $10,000 or 2% of the building’s unadjusted basis |
Appliances, carpet and land improvements: shorter lives and bonus depreciation
Not everything in a rental is 27.5-year property. Publication 527 assigns 5 years to appliances, carpets and furniture used in residential rentals, and 15 years to land improvements such as fences, driveways, roads and shrubbery. Those items are depreciated separately and much faster.
Because they have recovery periods of 20 years or less, these shorter-life items can qualify for bonus depreciation. Public Law 119-21 made the 100% special depreciation allowance permanent for qualified property acquired and placed in service after January 19, 2025, and the IRS gave interim rules in Notice 2026-11. A $1,800 range and a $3,400 carpet replacement bought in 2026 can be written off in full in the year they are placed in service, if they aren’t already covered by the de minimis election. The building itself never qualifies for bonus depreciation.
Property acquired before January 20, 2025 stays under the older phase-down rules, and some states do not follow federal bonus depreciation at all, so your state return may show a different number.
| Asset in a residential rental | Recovery period (GDS) | Bonus depreciation eligible? |
|---|---|---|
| Building and structural components | 27.5 years | No |
| Roof, HVAC, windows, plumbing replacements | 27.5 years | No |
| Appliances, carpet, furniture | 5 years | Yes |
| Fences, driveways, landscaping, sidewalks | 15 years | Yes |
| Land | Not depreciable | No |
Rental building depreciation on larger properties
Rental building depreciation follows the same 27.5-year rules for a fourplex or a 200-unit apartment complex, but larger buildings usually justify a cost segregation study. An engineer-based study separates cabinets, flooring, site work and certain electrical and plumbing into 5-, 7- and 15-year classes, which then qualify for bonus depreciation. Total depreciation over the life of the building doesn’t change. The timing moves forward.
In a syndication, the partnership owns the building and claims the depreciation, then passes your share to you on Schedule K-1. You don’t calculate it yourself, but the same rules drive the figure. Most syndications are offered to accredited investors under Regulation D, and the rules for Rule 506(b) and Rule 506(c) offerings differ on advertising and investor verification. Any offering is made only through official offering documents to eligible investors.
Whether you can use the deduction is a separate question. Rental losses are generally passive under Section 469, so they offset passive income first, and unused losses carry forward. Owners who actively participate may deduct up to $25,000 of rental losses against other income, phasing out between $100,000 and $150,000 of modified adjusted gross income, according to IRS Publication 925. Limited partners usually can’t use that allowance.
Depreciation recapture when you sell
When you sell a rental at a gain, the part of the gain equal to the depreciation you took (or could have taken) is unrecaptured Section 1250 gain, taxed at a maximum federal rate of 25% according to IRS Topic 409. The rest of the gain is taxed at long-term capital gains rates of 0%, 15% or 20%.
Back to the example. The investor sells for $560,000 and pays $33,600 in selling costs, so the amount realized is $526,400. Adjusted basis is $456,000 plus the $24,000 roof, minus $93,338 of depreciation, or $386,662. Total gain is $139,738.
Of that gain, $93,338 is unrecaptured Section 1250 gain. At the 25% maximum, that is up to $23,335 of federal tax. The remaining $46,400 is regular long-term capital gain; at a 15% rate it adds $6,960. Higher earners may also owe the 3.8% net investment income tax on the whole gain, and most states tax it as ordinary income.
Appliances, carpet and other 5-year property are Section 1245 property. Depreciation on those items is recaptured as ordinary income at your regular rate, up to the gain on those items. Land improvements such as fences and driveways can be Section 1245 or Section 1250 property, and bonus or other depreciation beyond straight-line on them is also generally recaptured as ordinary income. That is one reason to keep a clear asset list and assign a reasonable value to personal property at sale. The depreciation recapture calculator runs these numbers for your own sale.
A 1031 exchange into another investment property defers both the capital gain and the recapture. The deferred depreciation carries into the replacement property’s basis. Heirs who inherit the property get a basis stepped up to fair market value, which generally removes the recapture entirely.
If you forgot to claim depreciation
If you didn’t claim depreciation, you still owe recapture on it at sale, because the IRS reduces basis by the depreciation you were allowed to claim even if you didn’t claim it. Skipping depreciation never saves tax. It just loses the deduction.
You can usually recover the missed amount. If you have used an incorrect method for two or more years, the fix is generally a change in accounting method on Form 3115, which lets you take all the missed depreciation in the current year as a catch-up adjustment instead of amending old returns. If you missed only one year, an amended return is often simpler. Your CPA can tell you which applies.
Using a depreciation of rental property calculator
A depreciation calculator for rental property needs only four inputs: total cost, land percentage, the month and year placed in service, and any improvements with their dates. With those, it applies the Table 2-2d rate for year 1 and 3.636% for each full year after.
You can build one in a spreadsheet in a few minutes. Put building basis in one cell, the year 1 rate from the table above in another, and 1/27.5 for later years. Add a row for each improvement. To see the full picture on a property you’re thinking of buying, the rental property calculator shows cash flow, and the cost segregation calculator estimates how much of a larger building might move into shorter lives.
Check the result against the depreciation line on your Schedule E or K-1 from last year. If the numbers don’t match, the difference is usually the land split, a missing improvement or the wrong start month.
