Depreciation on Rental Property Explained: The Ultimate 2026 Guide

Depreciation on rental property is one of the most valuable tax benefits available to real estate investors—yet it's often misunderstood. This comprehensive guide explains everything you need to know about rental property depreciation, from basic calculations to advanced strategies that can save you thousands.

What Is Depreciation on Rental Property?

Depreciation is a tax deduction that allows you to recover the cost of your rental property over time. The IRS recognizes that buildings wear out and lose value, so they let you deduct a portion of your property's cost each year.

The key benefit: Depreciation is a "paper loss." You get a tax deduction without spending any money, which can significantly reduce your taxable rental income.

Why Depreciation Matters

Consider a rental property generating $20,000 in net operating income:

That's an extra $2,560 in your pocket every year—without doing anything differently.

How Depreciation on Rental Property Works

The Basic Formula

Annual Depreciation = Depreciable Basis ÷ Recovery Period

Where:

• Depreciable Basis = Purchase Price - Land Value + Improvements
• Recovery Period = 27.5 years (residential) or 39 years (commercial)

Step-by-Step Calculation

Step 1: Determine Your Cost Basis

Your cost basis typically includes:

• Purchase price
• Closing costs that must be capitalized
• Any improvements made before renting

Step 2: Subtract Land Value

Land doesn't depreciate—only the building does. Common methods to determine land value:

• Property tax assessment (land vs. improvements)
• Professional appraisal
• County records
• Comparable land sales

Example: Purchased for $400,000, land valued at $80,000

• Depreciable basis = $400,000 - $80,000 = $320,000

Step 3: Divide by Recovery Period

• Residential rental: $320,000 ÷ 27.5 = $11,636 per year
• Commercial property: $320,000 ÷ 39 = $8,205 per year

Step 4: Apply the Mid-Month Convention

In the year you acquire the property, you only depreciate from the month placed in service. If you buy in July, you get 5.5 months of depreciation (July through December).

Types of Depreciation for Rental Property

1. Straight-Line Depreciation (Standard)

The default method for real estate:

• Same deduction every year
• 27.5 years for residential rentals
• 39 years for commercial properties
• Simple to calculate and track

2. Accelerated Depreciation (Cost Segregation)

Through a cost segregation study, certain components can be depreciated faster:

Benefit: Larger deductions in early years of ownership.

3. Bonus Depreciation

Currently, you can immediately deduct a percentage of qualifying assets:

• 2024: 60% immediate deduction
• 2025: 40% immediate deduction
• 2026: 20% immediate deduction

Combined with cost segregation, this can create massive first-year deductions.

Depreciation on Rental Property: Common Scenarios

Scenario 1: Single-Family Rental

Property: $300,000 purchase, $60,000 land value

• Depreciable basis: $240,000
• Annual depreciation: $240,000 ÷ 27.5 = $8,727

Scenario 2: Multi-Family Property

Property: $800,000 purchase, $150,000 land value

• Depreciable basis: $650,000
• Annual depreciation: $650,000 ÷ 27.5 = $23,636

Scenario 3: Commercial Building

Property: $1,500,000 purchase, $300,000 land value

• Depreciable basis: $1,200,000
• Annual depreciation: $1,200,000 ÷ 39 = $30,769

Scenario 4: With Cost Segregation

Using the single-family example above with cost segregation (25% reclassified):

• 5-year property (15%): $36,000
• 15-year property (10%): $24,000
• 27.5-year building (75%): $180,000

First-year depreciation (with 40% bonus):

• 5-year: $14,400 bonus + $4,320 regular = $18,720
• 15-year: $9,600 bonus + $800 regular = $10,400
• Building: $6,545 (half-year)
• Total: ~$35,665 vs. $8,727 standard

That's 4x more depreciation in year one!

Depreciation on Improvements

When you improve your rental property, those improvements are depreciated separately:

Calculating Improvement Depreciation

• Start fresh 27.5 or 39-year schedule
• Begins when improvement is placed in service
• Can apply cost segregation to large improvements

Example: $50,000 kitchen renovation

• Annual depreciation: $50,000 ÷ 27.5 = $1,818
• With cost seg (appliances as 5-year): Faster deductions on qualifying portions

Capital Improvements vs. Repairs

Capital Improvements (must depreciate):

• New roof
• HVAC replacement
• Room additions
• Kitchen/bath remodels

Repairs (immediately deductible):

• Fixing leaks
• Patching walls
• Repainting
• Replacing broken fixtures

Safe Harbor: Items under $2,500 can be expensed immediately (de minimis safe harbor election).

Depreciation Recapture: What Happens When You Sell

When you sell a rental property, the IRS "recaptures" the depreciation you claimed:

How Recapture Works

• Depreciation taken is taxed at up to 25% upon sale
• This is in addition to capital gains taxes
• Applies whether you claimed depreciation or not

Example:

• Original basis: $200,000
• Depreciation claimed: $40,000
• Adjusted basis: $160,000
• Sale price: $280,000
• Gain: $120,000
• Depreciation recapture (25%): $40,000 × 25% = $10,000
• Capital gains (15%): $80,000 × 15% = $12,000
• Total tax: $22,000

Important Note

The IRS calculates recapture as if you took depreciation, even if you didn't claim it. Always claim your depreciation—you're paying recapture regardless.

Avoiding Recapture

1031 Exchange: Defer all taxes by exchanging into another investment property Hold Until Death: Heirs receive stepped-up basis, eliminating recapture Installment Sale: Spread tax liability over multiple years

Common Depreciation Mistakes

Mistake 1: Not Claiming Depreciation

Some investors think skipping depreciation avoids recapture. Wrong—the IRS calculates recapture on "allowed or allowable" depreciation.

Mistake 2: Wrong Land Value Allocation

Overvaluing land reduces your depreciable basis. Use reasonable allocation methods and document your approach.

Mistake 3: Missing the Mid-Month Convention

Year one depreciation depends on what month you placed the property in service. Many investors claim a full year incorrectly.

Mistake 4: Depreciating Land Improvements at 27.5 Years

Items like driveways, fencing, and landscaping are 15-year property, not building. You're missing faster deductions.

Mistake 5: Not Doing Cost Segregation

Many investors stick with straight-line when cost segregation could provide significantly more benefit.

Maximizing Depreciation on Rental Property

Strategy 1: Cost Segregation Study

For properties over $200,000, a cost segregation study can identify 20-40% of your basis as short-life property, dramatically accelerating deductions.

Best candidates:

• Recently purchased properties
• New construction
• Major renovations
• Properties with lots of improvements

Strategy 2: Bonus Depreciation

While still available (through 2026), bonus depreciation allows immediate deduction of qualifying assets identified through cost segregation.

Strategy 3: Proper Improvement Categorization

When making improvements, work with your CPA to:

• Identify items that can be expensed immediately
• Categorize short-life property separately
• Apply cost segregation to large renovations

Strategy 4: Look-Back Studies

If you've owned property for years without cost segregation, you can:

• Conduct a study for any prior year
• File Form 3115 to change accounting method
• Claim all missed depreciation in one year

Depreciation and Passive Losses

Depreciation often creates "paper losses" on properties with positive cash flow. Understanding passive loss rules is crucial:

The $25,000 Allowance

If your AGI is below $100,000, you can deduct up to $25,000 in passive losses against ordinary income. This phases out between $100,000-$150,000.

Real Estate Professional Status

If you qualify (750+ hours in real estate, more than any other profession):

• Rental losses become non-passive
• Can offset unlimited W-2 income
• Particularly valuable with cost segregation

Suspended Losses

Passive losses you can't use carry forward and are released when you:

• Have passive income to offset
• Sell the property
• Qualify as a real estate professional

Tracking Depreciation Over Time

Proper record-keeping is essential:

What to Track

• Original cost basis
• Land value allocation
• Date placed in service
• Improvements and their dates
• Annual depreciation claimed
• Cost segregation asset details

Tools for Tracking

• Tax software (TurboTax, etc.)
• Property management software
• Spreadsheets
• CPA depreciation schedules

Retention Requirements

Keep depreciation records for:

• As long as you own the property
• Plus 7 years after selling
• Needed for recapture calculations

Frequently Asked Questions

Can I depreciate a property I live in part-time?

Only the rental portion qualifies. If you rent 9 months and use personally for 3 months, depreciate 75%.

What if I bought a property years ago and never claimed depreciation?

File Form 3115 to catch up. You can claim all missed depreciation in the current year without amending prior returns.

Does depreciation affect my property's value?

No—depreciation is a tax concept only. Your property's market value is independent of tax depreciation.

Can I depreciate furniture in a furnished rental?

Yes—furniture, appliances, and other personal property are typically 5-7 year property with their own depreciation schedules.

Conclusion

Depreciation on rental property is one of the most powerful wealth-building tools available to real estate investors. By understanding how it works and implementing strategies like cost segregation, you can significantly reduce your tax burden and accelerate your investment returns.

Key takeaways:

Always claim your depreciation

Understand the difference between standard and accelerated depreciation

Consider cost segregation for properties over $200,000

Track everything carefully for accurate recapture calculations

Work with a real estate-savvy CPA

---

Supercharge Your Depreciation in Minutes

Why settle for standard 27.5-year depreciation when you could be deducting 3-5x more in year one? Our platform analyzes your rental property and identifies every asset eligible for accelerated depreciation—instantly.

Accelerate Your Depreciation Now →

Add your property and see exactly how much more you could be deducting. Transform your depreciation strategy in minutes, not weeks.