Rental property depreciation: how to calculate it, with examples

Rental property depreciation is a yearly tax deduction for the wear on a rental building: you deduct the building's cost, but not the land's, in equal amounts over 27.5 years for residential property. On a $400,000 rental with an 80% building share, that is roughly $11,600 a year you deduct from your rental income without spending a dollar that year.

The deduction is not optional, and it is not free. The IRS reduces your basis by the depreciation you were allowed whether you claimed it or not, and when you sell, that depreciation is taxed at up to 25%.

How does rental property depreciation work?

The tax code treats a rental building as an asset that wears out, so instead of deducting its cost in the year you buy it, you deduct it a piece at a time over its recovery period. For residential rental property that is 27.5 years under the general depreciation system (MACRS), using the straight-line method: the same amount each full year.

Three rules shape every rental's schedule:

Land is never depreciated. Only the building, its structural parts and certain costs of buying it.
The mid-month convention. Whatever day in the month you place the property in service, the IRS treats it as the middle of that month, so the first year is a partial year.
Depreciation starts when the property is placed in service, which for a rental means ready and available to rent, not the day a tenant moves in.

Depreciation is a paper expense. It lowers your taxable rental income without any cash leaving your account, which is why a rental can show a loss on Schedule E while it pays you every month. It is not an operating cost, so it is left out of net operating income and out of a lender's coverage math.

How to calculate depreciation on a rental property

Work out your cost basis: the purchase price plus the closing costs that belong in basis.
Subtract the land. Use the ratio of land to building value at purchase, often from the property tax assessment.
Find the first-year percentage for the month you placed it in service, from the IRS table.
Deduct 1/27.5 of the building basis each full year after that, about 3.636%.

What goes into your basis

In your basis	Not in your basis
The purchase price	Points and loan origination fees
Title insurance and abstract fees	The lender's appraisal and credit report
Legal and recording fees	Fire or hazard insurance premiums
Surveys and transfer taxes	Taxes and insurance paid into escrow
Charges to install utilities	Rent or charges for occupying it before closing
Seller costs you agreed to pay, such as back taxes	Repairs you deduct as an expense

Loan costs are not lost: on a rental they are generally spread over the life of the loan as their own deduction.

Separating land from the building

The IRS wants the split based on fair market value at purchase. If you do not have an appraisal that separates the two, you can use the ratio in the county's property tax assessment. If the assessment values the land at $66,000 and the improvements at $264,000, the building is 80% of the total, and 80% of your basis is depreciable.

The land share varies enormously. In a dense city or near water it can be half the value or more; on a suburban lot it might be 15% to 25%. Using an unrealistically small land figure is a common audit adjustment, so keep the record you used.

The first-year percentages

Because of the mid-month convention, the first year's deduction depends on the month. These are the IRS percentages for residential rental property (Table 2-2d in Publication 527), applied to the building basis:

Placed in service	Year 1	Placed in service	Year 1
January	3.485%	July	1.667%
February	3.182%	August	1.364%
March	2.879%	September	1.061%
April	2.576%	October	0.758%
May	2.273%	November	0.455%
June	1.970%	December	0.152%

Every full year after that is 3.636%, and the last year picks up the remainder.

A worked example: a long-term rental bought in 2026 (all figures are examples)

You buy a rental for $400,000 and pay $6,000 of closing costs that belong in basis (title insurance, recording, legal and transfer taxes). Your $5,000 of loan costs are left out and spread over the loan instead.

Step	Amount
Cost basis ($400,000 plus $6,000)	$406,000
Building share, from the assessment (80%)	$324,800
Land share (20%), never depreciated	$81,200
First year: ready to rent in April, 2.576% of $324,800	$8,366.85
Each full year after: $324,800 divided by 27.5	about $11,810.91

Years later you sell for $520,000 and pay $31,200 to sell, so you realize $488,800. Say you have claimed $90,000 of depreciation by then.

At the sale	Amount
Adjusted basis ($406,000 minus $90,000)	$316,000
Gain ($488,800 minus $316,000)	$172,800
Part from depreciation, taxed at up to 25%	$90,000, as much as $22,500
The rest, taxed as long-term capital gain (15% here)	$82,800, or $12,420

The federal tax could be as much as $34,920, before the 3.8% net investment income tax and any state tax. The depreciation lowered your taxable income by $90,000 over the years; at the sale, part of that benefit comes back.

You can run the rental's cash flow and returns alongside the tax picture in the deal calculator; depreciation itself never changes your monthly cash.

What else can you depreciate on a rental?

Anything you buy for the rental that lasts more than a year is depreciated rather than deducted at once, each over its own recovery period.

Item	Recovery period
The building, and improvements to it (a new roof, an addition, rewiring)	27.5 years
Appliances, carpets and furniture used in the rental	5 years
Office furniture and equipment	7 years
Land improvements: fences, driveways, sidewalks, shrubbery, patios	15 years

Repairs are different. Fixing a leak, patching drywall or replacing a broken window keeps the property in working order and is usually deducted in the year you pay for it. An improvement that betters the property, restores it or adapts it to a new use is capitalized and depreciated. The line between the two is fact-specific, and the IRS's repair regulations offer safe harbors your CPA can apply.

The shorter-lived parts matter more since 2025. For property acquired and placed in service after January 19, 2025, the One Big Beautiful Bill Act restored a permanent 100% bonus depreciation deduction, so appliances, furniture and land improvements can be written off in the first year. The building itself never qualifies. A cost segregation study is how owners find the parts of a purchase price that belong in those shorter classes.

When depreciation starts and stops

Depreciation starts in the month the property is placed in service: cleaned, repaired and available for rent, listed or advertised. A house that sits ready but vacant for two months is still in service. One you are still renovating is not.

If you convert your own home into a rental, the basis for depreciation is the lower of your adjusted basis or the home's fair market value on the date it becomes a rental, so a home bought high and converted in a down market starts from its lower value.

Depreciation stops when you have recovered the full basis, when you sell or otherwise dispose of the property, or when you stop using it as a rental. Vacancies between tenants do not stop it.

What is depreciation recapture?

When you sell a rental, the part of your gain created by depreciation is called unrecaptured section 1250 gain, and it is taxed at a maximum of 25% instead of the usual 0%, 15% or 20% long-term capital gains rates. The rest of the gain is ordinary long-term capital gain. Short-lived parts that took bonus or accelerated depreciation can be recaptured at ordinary income rates instead.

The recapture is based on depreciation allowed or allowable: what you were entitled to take, whether or not you took it. An owner who never claimed depreciation still has the basis reduced, and pays the recapture on deductions never enjoyed. That is why skipping depreciation to "avoid recapture" backfires.

You can defer recapture along with the rest of the gain by trading into another property through a 1031 exchange. Under current law, heirs who inherit a rental generally receive a stepped-up basis, which erases the built-up gain, recapture included.

Can rental depreciation offset your other income?

Usually not right away. Rental losses, including the ones depreciation creates, are passive, and passive losses generally offset only passive income. Unused losses carry forward and are released when you sell the property. There are three ways around that limit:

The $25,000 allowance. If you actively participate (you own at least 10% and make the management decisions), you can deduct up to $25,000 of rental losses against other income. It phases out between $100,000 and $150,000 of modified adjusted gross income.
Real estate professional status. If more than half of your working hours, and more than 750 hours a year, go into real estate businesses you materially participate in, and you materially participate in the rentals too, their losses can be nonpassive.
The short-term rental exception. A rental with an average stay of seven days or less is not a rental activity under the passive loss rules, so if you materially participate, its losses are nonpassive. See the short-term rental tax loophole.

A short-term rental: 27.5 or 39 years?

The 27.5-year period applies to residential rental property, which the Code defines by dwelling units, and it excludes units in a hotel, motel or other establishment where more than half the units are used on a transient basis. Because of that wording, many preparers depreciate a house rented mostly by the night over 39 years as nonresidential property. Others treat a single home as residential. It changes the deduction by almost a third, so settle it with your CPA before the first return.

What if you missed depreciation in past years?

If you did not claim depreciation, or claimed the wrong amount, you can amend a recent return. If you have used the wrong method for two or more years, the fix is usually a change in accounting method on Form 3115, which lets you catch up the missing depreciation in the current year without amending each old return. It is worth doing before a sale, since the recapture is owed either way.

Frequently asked questions

Do I have to depreciate my rental property?

In practice, yes. Depreciation is figured on what was allowed or allowable, so your basis drops each year whether or not you claim it. If you skip it, you lose the deduction now and still pay the recapture when you sell. The only real choice is whether to elect out of bonus depreciation on the shorter-lived parts, which some owners do when they cannot use the losses.

How much depreciation can I take on a rental each year?

For the building, about 3.636% of its depreciable basis each full year, which is the basis divided by 27.5. On a building basis of $324,800, that is about $11,811. The first year is smaller because of the mid-month convention: an April start gives 2.576%. Appliances, furniture and land improvements add their own deductions over 5 or 15 years, or all at once with bonus depreciation.

How do I figure out the land value for depreciation?

Use the land and building values at the time you bought the property. An appraisal that separates them is best; without one, the IRS accepts the ratio from your property tax assessment. If the assessor puts 20% of the value on the land, you depreciate 80% of your basis. Keep a copy of the assessment or appraisal with your tax records.

Can I depreciate a rental property I own through an LLC?

Yes. A single-member LLC is usually ignored for income tax, so you depreciate the property on your own Schedule E as if you held it directly. A multi-member LLC taxed as a partnership depreciates it on the partnership return and passes the deduction to the members on their K-1s. The 27.5-year rule and the land split are the same either way.

Is depreciation recapture taxed at 25%?

Up to 25%. The gain from depreciation on the building is taxed at your ordinary income rate but capped at 25%, so a lower-bracket owner can pay less. The 3.8% net investment income tax can apply on top for higher earners, and states add their own tax. Depreciation on short-lived parts that took bonus or accelerated depreciation can be recaptured at full ordinary rates.

Sources

General education, not financial, tax or legal advice. Figures are examples: rates, rules and programs change, and every lender sets its own. Last checked November 4, 2026.