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
📚 References
- IRS Publication 527 — Residential Rental Property (irs.gov/publications/p527)
- IRS Publication 946 — How to Depreciate Property (irs.gov/publications/p946)
- IRS Form 4562 — Depreciation and Amortization (irs.gov/forms-pubs/about-form-4562)
- IRC Section 168 — Modified Accelerated Cost Recovery System (irs.gov)