How rental property depreciation works
Annual depreciation = (price − land value + capitalized costs + improvements) ÷ 27.5
The IRS lets owners of residential rental property deduct the cost of the building, not the land, over 27.5 years using the straight-line method. In the first year, the mid-month convention treats the property as placed in service in the middle of the month, so a January purchase gets 11.5 months of depreciation and a December purchase gets half a month.
A worked example
You buy a rental for $300,000. The county assessment puts 20% of the value in land, so the land is $60,000 and the building is $240,000. You also capitalize $6,000 of closing costs.
- Depreciable basis: $240,000 + $6,000 = $246,000.
- Full-year depreciation: $246,000 ÷ 27.5 = $8,945.
- First year, placed in service in July: 5.5 months, or 1.667% of basis = about $4,100.
- At a 24% marginal rate, a full year of depreciation offsets about $2,147 of tax.
First-year depreciation by month
Under the mid-month convention, the first-year percentage depends on the month the property is placed in service (IRS Publication 946, Table A-6). Every full year after that is about 3.636% of the basis.
| Month placed in service | First-year share of basis | On a $246,000 basis |
|---|---|---|
| January | 3.485% | $8,573 |
| February | 3.182% | $7,828 |
| March | 2.879% | $7,082 |
| April | 2.576% | $6,337 |
| May | 2.273% | $5,592 |
| June | 1.970% | $4,846 |
| July | 1.667% | $4,101 |
| August | 1.364% | $3,355 |
| September | 1.061% | $2,610 |
| October | 0.758% | $1,865 |
| November | 0.455% | $1,119 |
| December | 0.152% | $374 |
Estimating the land value
Land is never depreciated. A common approach is to use the land and improvement split on your property tax assessment. The land share varies widely: it is small in many rural and suburban areas and can be the majority of value in expensive cities.
What the tax savings mean
Depreciation is a deduction against rental income, so it can reduce or eliminate tax on your cash flow. The estimate multiplies the deduction by your marginal rate. Passive activity rules can limit how much of a rental loss you can deduct against other income, and depreciation is generally recaptured and taxed when you sell.
Common questions
Can I depreciate the land? No. Only the building and certain improvements are depreciable.
When does depreciation start? When the property is placed in service, meaning it is ready and available to rent, not when the first tenant moves in.
What if I skip depreciation? When you sell, the IRS reduces your basis by the depreciation that was allowed or allowable, so skipping the deduction generally does not avoid recapture.
How is recapture taxed? Gain attributable to depreciation on real property is generally taxed at a maximum rate of 25% when you sell.
Are repairs depreciated? Repairs that keep the property in operating condition are usually deducted in the year paid. Improvements that add value or extend its life are capitalized and depreciated separately.
Do appliances use 27.5 years? No. Publication 527 lists appliances, carpets and furniture used in a residential rental as 5-year property, and fences and roads as 15-year property.
For the full rules, see IRS Publication 527 and Publication 946. This calculator is an estimate, not tax advice; a tax professional can confirm your basis and deductions.