How rental property depreciation works
Depreciation is one of the most valuable tax benefits of owning rental real estate. The IRS lets you deduct a portion of the building's cost every year to reflect wear and tear — even in years when the property actually appreciates in market value. The key rule is that you can only depreciate the building and improvements, never the land, because land does not wear out.
The straight-line MACRS calculation is simple:
- Building basis = purchase price − land value.
- Recovery period = 27.5 years for residential rental property, or 39 years for commercial property.
- Annual depreciation = building basis ÷ recovery period.
Worked example
You buy a residential rental for $300,000, and the assessed land value is $60,000. Your building basis is $300,000 − $60,000 = $240,000. Dividing by the 27.5-year residential schedule gives $240,000 ÷ 27.5 = $8,727.27 of depreciation you can deduct each year. Enter those numbers above to confirm.
Why the land split matters
Because land isn't depreciable, the way you allocate the purchase price between land and building directly changes your deduction. Many investors use the property tax assessor's land-to-building ratio to support their split. A higher building allocation means a larger annual deduction — but it must be reasonable and defensible.
What happens when you sell
Every dollar of depreciation you claim lowers your adjusted basis, which raises your taxable gain at sale and triggers depreciation recapture, taxed at up to 25%. That's not a reason to skip depreciation — the IRS assumes you took it whether you did or not — but it's why many investors pair depreciation with a 1031 exchange to defer the eventual tax. To pull deductions forward into the early years, see the cost segregation calculator.
Frequently asked questions
How is depreciation calculated?
Building basis (purchase price − land value) divided by the recovery period: 27.5 years for residential, 39 for commercial.
Can I depreciate the land?
No. Land doesn't wear out, so only the building and improvements are depreciable — that's why you subtract land value first.
What is the recovery period?
27.5 years for residential rental property and 39 years for commercial, both straight-line.
What happens when I sell?
Depreciation reduces your basis and is subject to recapture at up to 25% on sale. See the depreciation recapture calculator.
Related calculators
- Depreciation Recapture Calculator — the tax due on this depreciation when you sell.
- Cost Segregation Calculator — accelerate these deductions into year one.
- 1031 Exchange Calculator — defer the recapture tax.
- Cash-on-Cash Return Calculator — measure your annual return.