Rental Property Depreciation: The Tax Break Every Landlord Needs

What Is Depreciation?

Depreciation is a non-cash tax deduction that assumes your building decays/deteriorates over time and loses value.

IRS concept: Buildings have a useful lifespan. After that time, they're worthless. The IRS lets you deduct the building's value evenly across that lifespan.

Depreciation schedule (residential rental):

• Building structure: 27.5 years
• Appliances, flooring, carpeting: 5–7 years
• Land: Not depreciable (land doesn't wear out)

Example calculation:

Property purchase: $500,000
- Land value: $100,000 (not depreciable)
- Building value: $400,000 (depreciable)

Annual depreciation: $400,000 ÷ 27.5 = $14,545/year

Year 1: Deduction = $14,545
Year 2: Deduction = $14,545
...continuing 27.5 years

Key insight: You paid $400,000 for building. You didn't spend money to claim depreciation. You get a $14,545 deduction annually costing you zero cash.

How Depreciation Works on Your Taxes

Example: Rental house producing $50,000 gross rent/year

Without depreciation:

Rent collected: $50,000
Mortgage interest: -$10,000
Property tax: -$3,000
Insurance: -$1,500
Maintenance: -$2,000
Utilities: -$1,500
Taxable income: $32,000
Federal tax (24% marginal): $7,680

With depreciation:

Rent collected: $50,000
Mortgage interest: -$10,000
Property tax: -$3,000
Insurance: -$1,500
Maintenance: -$2,000
Utilities: -$1,500
Depreciation: -$14,545
Taxable income: $17,455
Federal tax (24% marginal): $4,189
Tax saved: $3,491 (from depreciation)

Net result: Same income, $3,491 less tax. The $14,545 depreciation deduction is worth your marginal rate times the deduction — $3,200 at 22%, $3,491 at 24%, $4,654 at 32%. It is not worth 21% unless you hold the property inside a C corporation, which almost no individual landlord does.

Over the full schedule (27.5 years, not 30):

• Total depreciation: $14,545 × 27.5 = $400,000 — you cannot depreciate more than your building basis, so the deduction stops when the basis is exhausted
• Tax saved at 22–32%: $88,000–$128,000

And the property has appreciated (not depreciated) in actual value, likely to $600,000–$800,000.

Who Can Claim Depreciation?

Eligibility:

• Landlord (not owner-occupant)
• Rental property (generates rental income)
• Property placed in service after 2007 (or at purchase)
• You must own the property (not mortgaged to someone else)

Properties that qualify:

• Single-family rental home
• Multi-unit rental (duplex, triplex, apartment)
• Commercial rental property (office, retail, warehouse)

Properties that don't qualify:

• Primary residence (owner-occupant)
• Vacation home you use (personal use)
• Land (not depreciable)
• Foreign rental property (usually)

Calculating Depreciation: Step-by-Step

Step 1: Determine property purchase price

You buy rental house for $500,000 (purchase price)

Step 2: Split land and building Common approach: Allocate based on county assessor values.

If county assessment shows:

• Land: 20% = $100,000
• Building: 80% = $400,000

Use these percentages on purchase price:

• Land: $500,000 × 20% = $100,000 (not depreciable)
• Building: $500,000 × 80% = $400,000 (depreciable)

Step 3: Choose depreciation method

Straight-line (most common):

Depreciable basis: $400,000
Useful life: 27.5 years (residential)
Annual depreciation: $400,000 ÷ 27.5 = $14,545

Accelerated depreciation (MACRS, first few years higher):

Year 1: $14,545 × 1.5 = $21,818 (150% declining balance)
Year 2: Recalculate based on remaining basis
Usually higher in early years, lower in later years
Total deduction same over 27.5 years

Most landlords use straight-line (simpler).

Step 4: Claim on tax return (Form 4562, Schedule E)

Report annual depreciation on Schedule E (Supplemental Income).

Bonus Depreciation and Section 179

Bonus depreciation (2026): You can deduct the entire building value in year 1 (not spread over 27.5 years).

Example:

Building value: $400,000
Bonus depreciation (2026): 80% = $320,000 deduction year 1
Remaining: $80,000 spread over 27.5 years = $2,909/year

Year 1 deduction: $320,000 (huge tax savings)
Subsequent years: $2,909/year
Total: Same $400,000 over time, but front-loaded

Benefit: If you have high income year 1, massive deduction offsets it.

Caveat — this changed in 2025. The TCJA phase-down (80% in 2023, 60% in 2024, 40% in 2025, expiring in 2027) is gone. OBBBA §70301 amended §168(k) to make 100% bonus depreciation permanent for qualified property acquired after 19 January 2025. There is no longer a deadline to beat. You may still elect 40% instead of 100% under §168(k)(10) if a larger current-year deduction would waste itself against low income.

Section 179 (equipment): Appliances, HVAC, flooring, etc. can be deducted in year 1 (not over many years).

Example:

New appliances: $8,000 (typically depreciable over 5 years)
Section 179: Deduct entire $8,000 in year 1
Tax savings: $8,000 × 24% (marginal rate) = $1,920

Combined with bonus depreciation, first-year deductions can be massive for new rental purchases.

Depreciation Recapture at Sale

The catch: When you sell the property, depreciation you claimed is "recaptured" and taxed at 25% (not 15% capital gains rate).

Example:

Buy property: $500,000
Building value: $400,000

Depreciate over 30 years: $14,545/year × 30 = $436,350 total claimed

Sell property 30 years later for: $750,000
Building value (post-appreciation): $650,000

Sale calculation:
Sale price: $750,000
Adjusted basis: $500,000 – $436,350 (depreciation claimed) = $63,650
Gain: $750,000 – $63,650 = $686,350

Depreciation recapture (25%):
Depreciation claimed: $436,350
Recapture tax: $436,350 × 25% = $109,087

Capital gains (15%):
Remaining gain: $686,350 – $436,350 = $250,000 × 15% = $37,500

Total tax: $109,087 + $37,500 = $146,587

The math:

• Depreciation deductions saved (over 30 years): ~$100,000 in taxes
• Recapture tax at sale: $109,087
• Net: You break even or lose slightly on tax

However, you got $100,000 of tax deferral (paid 30 years later), which allowed you to reinvest that money and earn returns.

Strategy: Hold property long-term (30+ years) and pass to heirs. They get "stepped-up basis" (depreciation recapture essentially forgiven).

Depreciation Recapture and 1031 Exchange

1031 Exchange: Sell one rental, buy another, defer all taxes (including recapture).

Strategy:

• Sell property A: Gain $200,000, depreciation recapture $100,000
• Owe tax: $0 (with 1031 exchange)
• Buy property B with proceeds
• The recapture tax is deferred, not eliminated

Lifetime benefit: Defer recapture taxes until you finally sell without exchanging (or pass to heirs for stepped-up basis).

Passive Loss Limitations

Important rule: You can only deduct rental losses if you "actively participate" in the rental (landlord decisions, tenant approval, repairs).

Example:

Rental property produces:
Rent: $50,000
Expenses: $60,000
Loss: $10,000

With $10,000 loss:
If you actively participate: Deduct up to $25,000 loss/year (special rule)
If you don't actively participate: Deduct $0 this year (passive loss, must carry forward)

Active participation = you make landlord decisions (pick tenants, approve repairs, set rent).

Passive activity = just an investor with property manager (can't deduct losses currently).

Your Depreciation Strategy Checklist

• Calculate building value separate from land value
• Claim straight-line depreciation ($400k building ÷ 27.5 = $14,545/year)
• Consider bonus depreciation in year 1 (if applicable)
• Report depreciation on Schedule E (form 4562)
• Track cumulative depreciation claimed (important at sale)
• Plan for recapture tax at future sale (budget 25% of depreciation)
• Consider 1031 exchange to defer recapture tax
• Document active participation (landlord decisions)
• Consult CPA/tax attorney for specifics

Sources

• Internal Revenue Service. Publication 527, Residential Rental Property. https://www.irs.gov/publications/p527
• Internal Revenue Service. Publication 946, How To Depreciate Property. https://www.irs.gov/publications/p946
• Internal Revenue Service. Treasury, IRS issue guidance on the additional first year depreciation deduction amended as part of the One, Big, Beautiful Bill. https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill
• Internal Revenue Service. Depreciation recapture FAQs. https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals/depreciation-recapture/depreciation-recapture
• One, Big, Beautiful Bill Act, P.L. 119-21, §70301 (permanent 100% bonus depreciation under 26 U.S.C. §168(k)).