How does rental property depreciation work?
Quick answer
Depreciation lets you deduct the cost of a rental building over time, since it wears out with use. You spread the building's value, not the land, across a recovery period set by the IRS. Each year you claim a portion as an expense on Schedule E, which lowers your taxable rental income without spending any new cash.
What depreciation is and why it matters
The IRS treats a rental building as an asset that slowly wears out. Depreciation is the deduction that reflects that wear. It lets you recover the purchase cost gradually rather than all at once in the year you buy.
This is one of the most valuable landlord deductions because it needs no ongoing cash. You already paid for the property. Depreciation simply converts part of that cost into a yearly write-off against your rental profit.
How to calculate rental property depreciation
The calculation follows a clear path:
- Find your cost basis: Start with the purchase price plus buying costs like title fees, then add later improvements.
- Separate the land: Land never wears out, so it cannot be depreciated. Split the basis between land and building, often using the county assessor's ratio.
- Apply the recovery period: Residential rental buildings use a 27.5 year schedule under the IRS MACRS system.
- Divide: The building basis divided by 27.5 gives your roughly even annual deduction.
You report the figure on Form 4562 in the first year, then carry it to Schedule E each year after. A property bought partway through the year is prorated, so you claim only the months it was in service.
What you cannot depreciate, plus recapture
Land and your personal residence cannot be depreciated, and neither can an item that wears out within a single year. Furniture and appliances can be depreciated, but on shorter schedules than the building, so track those items separately.
The catch arrives at sale. The IRS assumes you took the depreciation you were entitled to, whether you actually did or not. It recaptures that amount as taxable gain. Skipping depreciation does not avoid the tax, it only forfeits the yearly benefit.
Getting your cost basis right
Your deduction is only as accurate as your cost basis. Keep closing statements, records of every capital improvement, and the assessor documents you used to split land from building. Weak basis records cause both under-claiming now and surprises at sale.
Depreciation interacts with passive loss limits and state tax treatment, and those rules vary by situation and location. Confirm the specifics with an accountant, and see our state guides at /laws/ for rules that change by state.
How Rentari helps
Depreciation only works if your basis records survive the years between purchase and sale. Auto-Accounting keeps a permanent ledger of the property and every capital improvement you add, so the numbers are there when your accountant needs them. Expense and Receipt Scanning captures improvement invoices before they disappear into a drawer.
At tax time, Tax-Ready Reporting pulls income, expenses, and your depreciation figures into a per-property Schedule E view. You get a clean starting point for Form 4562 instead of rebuilding history from memory.
Related questions
How many years do I depreciate a rental property?
Can I skip depreciation to keep my taxes simple?
Do I depreciate the land my rental sits on?
This article is general information for landlords, not legal, tax, or financial advice. Rules vary by state and city; verify specifics with the official statute or a licensed professional. See our state law guides.