Depreciation is one of the most valuable — and most misunderstood — tax benefits available to rental property owners. It lets you deduct a portion of the property's value from your taxable income every year, even while the property is (hopefully) appreciating in actual market value.

This guide is educational and general in nature. Depreciation rules are detailed and change periodically — always confirm your specific situation with a qualified tax professional.

The Basic Concept

The IRS allows residential rental property to be depreciated over 27.5 years using the straight-line method. This assumes the building wears out evenly over that period, even though real property often appreciates rather than loses value.

Annual Depreciation = Building Value ÷ 27.5
Land is never depreciable — only the structure

Land vs. Building Allocation

Because land doesn't depreciate, you first need to split the purchase price between land and building value. A common approach is to use the county tax assessor's allocation percentage, or an appraisal that separates the two values.

Example — $350,000 Rental Purchase
Total Purchase Price$350,000
Land Value (20%)$70,000
Building Value (80%)$280,000
Annual Depreciation ($280,000 ÷ 27.5)$10,182

That $10,182 is deducted from your taxable rental income every year for 27.5 years — even if your actual cash flow is positive. This is why many profitable rental properties show a "loss" on paper for tax purposes.

Depreciation Recapture at Sale

When you eventually sell, the IRS "recaptures" the depreciation you claimed by taxing it — currently at a maximum rate of 25% — separately from your regular capital gains rate. This is a common surprise for sellers who forget that depreciation deductions were a deferral, not a permanent tax savings.

Key insight: A 1031 exchange allows investors to defer both capital gains tax and depreciation recapture by rolling proceeds into another investment property, rather than cashing out. This is a core strategy in long-term real estate portfolio building.

Cost Segregation

Larger investors sometimes use a cost segregation study to break out components of the building (appliances, flooring, fixtures) that qualify for shorter depreciation schedules — 5, 7, or 15 years instead of 27.5 — accelerating deductions in the early years of ownership. This typically only makes economic sense above a certain property value due to study costs, so it's most common with larger or higher-value properties.