Depreciation is a tax deduction that lets you recover the cost of an income-producing building gradually over its useful life. Instead of deducting the full purchase price in the year you buy, you deduct a portion each year. It reflects the idea that buildings wear out over time.
Depreciation is a non-cash expense: you do not write a check for it, but it lowers your taxable rental income. That is why it is one of the biggest tax benefits of owning rentals.
How it works
For US federal taxes, residential rental property is generally depreciated over 27.5 years using the straight-line method. Commercial property is generally depreciated over 39 years. Key points:
- Only the building counts. Land is not depreciable, so you must separate the land value from the building value.
- Basis includes more than the price. Certain closing costs and the cost of capital improvements are added to the basis and depreciated.
- It starts when the property is placed in service, meaning ready and available to rent, not when you bought it.
- Shorter lives apply to some items, such as appliances, carpet and certain land improvements.
How to calculate it
Annual depreciation = (Purchase price plus eligible costs minus land value) / 27.5
Worked example
A hypothetical investor buys a rental house for $360,000 and pays $6,000 in eligible closing costs. The county assessment suggests the land is worth about 25% of the total, or $91,500.
- Depreciable basis: $366,000 minus $91,500 = $274,500
- Annual depreciation: $274,500 / 27.5 = about $9,982
If the property produces $12,000 in taxable rental income before depreciation, the deduction brings it down to about $2,018. The first and last years are prorated based on the month the property is placed in service.
Why it matters for landlords
Depreciation can shelter a large part of your rental income from tax, improving after-tax cash flow. It also lowers your basis, which raises your taxable gain when you sell, and part of that gain is taxed as depreciation recapture. Keeping accurate purchase, improvement and depreciation records makes tax time and an eventual sale much easier. TenantLoop accounting helps you track those costs by property, and our bookkeeping for landlords article explains the basics. Because the rules have many exceptions, work with a CPA on your depreciation schedule.
Related terms
In practice. How the term shows up day to day.
Can I depreciate the land under my rental?
No. Land is not depreciable because it does not wear out. You need to split your purchase price between land and building, often using the property tax assessment or an appraisal as a guide.
What is depreciation recapture?
When you sell a rental, the depreciation you claimed (or were allowed to claim) is generally taxed, often at a rate of up to 25% for real property. A 1031 exchange can defer this tax.
Do I have to take depreciation?
Depreciation is generally treated as allowed or allowable, which means the IRS can reduce your basis by the amount you could have claimed even if you did not. Talk with a CPA if you have missed it in past years.