How rental depreciation is calculated
Start with the depreciable basis: the purchase price plus settlement costs that belong in basis (title insurance, recording and legal fees, transfer taxes, surveys) plus improvements made before the property was rented, minus the value of the land. Land is never depreciated. Loan costs such as points and mortgage insurance are not part of the basis.
The full-year deduction is the basis divided by 27.5. In the first year you only get part of it: the mid-month convention treats the property as placed in service in the middle of its month, so the first year gets (12 − month + 0.5) ÷ 12 of a full year. A rental placed in service in January gets 3.485% of its basis in year one; one placed in service in December gets 0.152%. The last year picks up whatever is left.
A worked example
A house is bought for $350,000, of which the land is worth $70,000, with $5,000 of settlement costs that go into basis. The depreciable basis is $350,000 + $5,000 − $70,000 = $285,000, and the full-year deduction is $285,000 ÷ 27.5 = $10,363.64.
The house is ready and advertised for rent in July, so year one covers 5.5 months: $10,363.64 × 5.5 ÷ 12 = $4,750.00. After five tax years (the partial first year plus four full years) the total taken is $46,204.55. If the house were sold then, up to that amount would be taxed as unrecaptured section 1250 gain at a rate of no more than 25%, roughly $11,551.
Splitting land from building
The land value has the biggest effect on the result. A common approach is to use the ratio from the county property tax assessment: if the assessor values the land at 20% of the total, allocate 20% of your purchase price to land. An appraisal that values land and building separately is stronger support. Whatever method you use, keep the document with your records.
When depreciation starts, and when it stops
Depreciation starts when the property is placed in service, meaning ready and available for rent, not when you bought it or when the first tenant arrived. A house bought in March, renovated, and listed for rent in July starts in July. It stops when you have recovered the whole basis, or earlier when you sell the property or stop renting it.
The deduction is reported on Form 4562 in the first year and carried to Schedule E. The IRS reduces your basis by the depreciation you were entitled to take, even if you did not claim it, so skipping it does not avoid recapture later. Keep the schedule with the rental property accounting checklist and the 1099 records described in 1099 tax season for property managers.
Improvements, appliances and short-term rentals
Improvements made after the property is in service, such as a new roof, are depreciated as separate assets from the month they are placed in service, usually also over 27.5 years. Appliances, carpets and furniture used in a rental have much shorter lives (often five years), which is what a cost segregation study separates out. This calculator treats everything in the basis as building.
Short-term and vacation rentals can be treated differently, depending on how the property is used, and the 39-year nonresidential period or other rules may apply. The Airbnb host tax deductions article covers the other deductions hosts commonly miss. If you elect the alternative depreciation system, residential rental property placed in service after 2017 uses 30 years instead. Confirm the right treatment with a tax adviser.
Common questions
How many years do you depreciate a rental property?
27.5 years for residential rental property under the general depreciation system, using straight-line and the mid-month convention. Nonresidential real property uses 39 years.
Can I depreciate the land?
No. Only the building and improvements are depreciated. Subtract the land value from the basis, for example using the land-to-total ratio from your property tax assessment.
What happens to depreciation when I sell?
The depreciation you took, or were entitled to take, reduces your basis and is generally taxed as unrecaptured section 1250 gain at a maximum rate of 25% when you sell at a gain.
What if I forgot to claim depreciation in earlier years?
The IRS still reduces your basis by the depreciation you could have taken. You may be able to catch up by amending recent returns or filing Form 3115 for a change in accounting method; ask a tax professional.
Does the first year get a full deduction?
No. Under the mid-month convention the first year covers only the months from the middle of the month the property was placed in service until the end of the year.
Done by hand once. Done automatically from now on.
Keep every rent payment and expense per property, so the numbers for Schedule E are already sorted at tax time.