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.
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.
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.