IRS Rental Property Tax Depreciation 27.5 Year Rule — 2026 Guide
When you buy a rental property, the IRS doesn't let you deduct the full purchase price in Year 1. Instead, you depreciate the building (not the land) over 27.5 years for residential rentals. This "paper loss" reduces your taxable rental income every year — even though the property is (hopefully) appreciating in value. This guide explains exactly how it works, with real numbers.
📋 What Is Depreciation (IRS Definition)?
Per IRS Publication 527 (Residential Rental Property), depreciation is the "wear and tear, deterioration, or obsolescence" of property used in a trade or business. The IRS assumes that buildings have a useful life, and lets you deduct a portion of the cost each year.
🏠 Residential vs. Commercial — The Two Timeframes
| Property Type | Depreciation Period | IRS Source | Mid-Month Convention? |
|---|---|---|---|
| Residential rental (SFR, condo, apartment) | 27.5 years | IRS Pub 527 | Yes (mid-month) |
| Commercial / non-residential | 39 years | IRS Pub 946 / IRC § 168 | Yes (mid-month) |
| Land improvements (driveway, landscaping) | 15 years | IRS Pub 946 | Yes |
| Personal property (appliances, furniture) | 5–7 years | IRS Pub 946 | No (mid-quarter) |
🧮 Step-by-Step: Calculate Your Annual Depreciation
Step 1: Separate Land Value from Building Value
Land cannot be depreciated. Check your county assessor's record: it typically lists land value as 15–30% of total assessed value.
Step 2: Apply the Straight-Line Formula
Step 3: Adjust for Mid-Month Convention (Year 1)
The IRS assumes you place the property in service in the middle of the month. If you close on June 15, you get ~5.5 months of depreciation in Year 1 (June 15 → Dec 31 = 5.5 months).
Most investors simplify and use 10.5 ÷ 12 = 0.875 (assuming a mid-year placement).
🏠 Complete Example: $320,000 SFR Purchase
Purchase: $320,000 SFR, placed in service June 15, 2026
Assessed land value: 20% → Land = $64,000, Building = $256,000
Annual depreciation: $256,000 ÷ 27.5 = $9,309 / year
Year 1 (mid-month): $9,309 × (10.5 ÷ 12) = $8,145
Years 2–27: $9,309 / year each
Year 28 (final): remaining balance (~$4,655)
💰 Tax Savings — The Real Benefit
Depreciation is a deduction, not a tax credit. It reduces your taxable rental income. The value of the deduction depends on your marginal tax bracket.
Tax Savings Example (22% bracket)
Rental income (before depreciation): $24,000
Operating expenses: −$9,600
Taxable income without depreciation: $14,400
Tax (22%): $3,168
Taxable income = $14,400 − $9,309 = $5,091
Tax (22%) = $1,120
Annual Tax Savings = $3,168 − $1,120 = $2,048
📅 Full 27.5-Year Schedule (Visual)
Each year you deduct the same amount (straight-line). Here are the first 5 and last 2 years:
⚠️ Depreciation Recapture on Sale
When you sell the rental property, the IRS "recaptures" the depreciation you claimed. This is taxed at 25% (Section 1250 unrecaptured depreciation recapture rate), which is higher than the long-term capital gains rate (15–20%).
🔄 Can I Accelerate Depreciation? (Cost Segregation)
A cost segregation study breaks the building into components (5-year, 7-year, 15-year property) that can be depreciated much faster than 27.5 years. This creates larger deductions in Years 1–5.
Cost seg studies typically cost $2,000–$5,000 and make sense for properties $500K+. The upfront cost is usually recovered in tax savings within 1–2 years for higher-bracket investors.
❓ FAQ — Depreciation
Worked example. A $350,000 building (land excluded) depreciates ~$12,727/year. Held 10 years, that is ~$127,000 of non-cash deductions — recaptured at sale unless deferred via 1031. Model it in our depreciation calculator.
Deep Dive: Depreciation as a cash-flow multiplier
Depreciation is the rare deduction that lowers your tax bill without taking a dollar out of your pocket. Because it is non-cash, the $12,727/year (on a $350,000 building) reduces taxable rental income while your bank balance is untouched — effectively increasing the cash you keep. For a landlord in a 24% bracket, that is roughly $3,000/year of tax not paid, money that can be re-deployed or held as reserve.
The mechanic matters: only the building depreciates, allocated over 27.5 years straight-line; land is excluded and must be separated from the purchase price. Improvements (a new roof, a remodeled kitchen) are capitalized and depreciated over their own lives, while ordinary repairs are expensed in the year incurred. Sloppy record-keeping here is the most common audit exposure, so keep a capitalized-cost schedule alongside receipts.
The catch is recapture. When you sell, the total depreciation taken is 'recaptured' and taxed up to 25% under §1250, separate from capital-gains rates — unless you defer it with a 1031 exchange into like-kind property. So depreciation is a timing tool: it improves cash flow every year you hold, and the bill comes due at exit unless you keep rolling via 1031. Model the annual deduction in our depreciation calculator and the deferral in our 1031 calculator so the full lifecycle is visible.
The practical takeaway: treat depreciation as a holding-period advantage, not a free lunch. It improves every year you keep the asset, and a 1031 defers the recapture bill at exit — but only if you actually plan the exit. Run the annual deduction in our depreciation calculator and the deferral in our 1031 calculator so the strategy is deliberate from purchase to sale.
Depreciation Recapture When You Sell
Depreciation is a gift while you own — a non-cash deduction that lowers taxable rental income every year — but the IRS collects on the way out. At sale, the total depreciation you claimed is recaptured and taxed (currently at a maximum 25% rate for the recaptured portion), on top of capital-gains tax on the appreciation. That does not make depreciation a trap; it is still almost always worth taking, because the deduction arrives years before the tax and you can invest the saved cash in the meantime. Two points soften the hit: a 1031 exchange defers both gains and recapture by rolling into like-kind property, and a step-up in basis at inheritance can erase recapture for heirs. Plan the exit as carefully as the deduction — depreciation lowers today's bill, but the sale math decides the net result.
Sources & Further Reading
- IRS — Publication 527, Residential Rental Property (depreciation & rental deductions).
- IRS — Tax Topic 414, Rental Income and Expenses.
- IRS — Rental Income and Expenses overview.
- U.S. Census Bureau — Housing data & vacancy statistics.
- National Multifamily Housing Council — Research & Insight (vacancy & cap-rate benchmarks).
- U.S. Department of Housing and Urban Development — Buying a Home (FHA loans).
- U.S. SEC — Securities and Exchange Commission (REITs & securities).
- NOLO — Legal encyclopedia (landlord–tenant basics).
Disclaimer: RentalInvestCalc provides free, 100% browser-local estimates for educational purposes only. We are not a lender, broker, tax advisor, or law firm. Nothing on this site is personalized advice, and estimates may not reflect your specific situation, local rules, or current rates. Always consult a licensed professional before acting.
Contact & corrections
RentalInvestCalc is an independent editorial project. Spot a data error or want a source added? Email 18999737@qq.com or read our About page. We publish estimates and guides, not tax, legal, or financial advice — always confirm figures with the county assessor and a licensed CPA or attorney.
Frequently Asked Questions
Residential rental real estate is depreciated straight-line over 27.5 years — a non-cash deduction. Size it with our depreciation calculator.
At sale, prior depreciation is 'recaptured' and taxed up to 25% (§1250), separate from capital-gains rates. A 1031 can defer it — see the 1031 calculator.
No — only the building depreciates; land is excluded. Allocate basis correctly with a CPA.
No — it is non-cash, so it lowers taxable income but not the cash in your pocket. That is why it is so valuable; model it in the depreciation calculator.
Depreciation is prorated for the days it is placed in service that year. The depreciation calculator uses annual figures — prorate for partial years.
Capital improvements are added to basis and depreciated; repairs are expensed. Keep clean records for audit defense.