How rental property depreciation works
The tax code treats a building as something that wears out, so you deduct its cost a slice at a time rather than all at once. Three things set the deduction: your basis in the property, its recovery period and the method. A residential rental, meaning a building where at least 80% of gross rent comes from dwelling units, is depreciated over 27.5 years, straight-line, with a mid-month convention: property placed in service in any month is treated as placed in service at the middle of that month.
Depreciation starts when the property is ready and available for rent, not when a tenant moves in, and continues while a unit sits empty between tenants. It stops when you have recovered the full basis or when you sell the property, convert it to personal use or otherwise retire it. You claim it on Schedule E with your other rental expenses, attaching Form 4562 in the first year.
Land never depreciates, and mortgage principal isn’t deductible at all; only the interest is a rental expense. Because depreciation is a deduction with no matching cash outlay, a rental can show a small taxable profit, or a loss, while still putting money in your pocket, a gap that shapes its cash flow.
How to calculate the deduction
Start with your depreciable basis: the purchase price plus most closing costs, such as title insurance, recording and legal fees and transfer taxes, minus the value of the land. Loan costs such as points aren’t included. Split the price between land and building by their fair market values; if you’re unsure, the IRS lets you use the ratio on your property tax assessment. A $200,000 purchase assessed at $136,000 for the house and $24,000 for the land, for example, puts 85% of the price, $170,000, in the building.
Divide the building basis by 27.5 for a full year’s deduction, about 3.636%. In the first year, count from the middle of the month the rental was placed in service: a house ready for rent in February gets 10.5 months, or 3.182%. Improvements such as a new roof are depreciated as separate assets on their own 27.5-year schedule from the date they’re placed in service, while ordinary repairs are deducted in the year you pay them.
If you convert your own home to a rental, the basis for depreciation is the lower of your adjusted basis or the home’s fair market value on the conversion date, so a drop in value while you lived there can’t be depreciated. If you rent only part of a property, such as one unit of a duplex or a room, you depreciate just that share of the building, a common setup in house hacking. Appliances, carpets and furniture are 5-year property and are written off faster than the building.
Depreciation recapture when you sell
Every dollar of depreciation lowers your cost basis, which raises your gain when you sell. The part of the gain that comes from depreciation on the building is unrecaptured Section 1250 gain. It is taxed at your ordinary income rate but never more than 25%, rather than the 0%, 15% or 20% that applies to other long-term capital gains. Appliances, carpets and other personal property are treated more harshly: gain on them is recaptured as ordinary income up to the depreciation taken.
The basis reduction applies to depreciation allowed or allowable, whichever is greater. If you never claim the deduction, your basis still falls as if you had, so you pay the recapture without ever getting the benefit. Missed depreciation can usually be recovered: after one return, by amending it; after two or more, by filing Form 3115 to change your accounting method.
Rental profit and gains can also count toward the 3.8% net investment income tax above its income thresholds. And if the property was once your main home, the home sale exclusion may shelter some of the appreciation but never the depreciation claimed after May 6, 1997.
Depreciation and the passive loss limits
Depreciation often turns a rental with positive cash flow into a tax loss, and the passive activity rules decide whether that loss can offset your wages. Rental real estate is generally passive, so a loss normally offsets only other passive income. The main exception: if you actively participate, meaning you own at least 10% and make management decisions such as approving tenants, rent and repairs, you can deduct up to $25,000 of rental loss against other income. The allowance shrinks by 50 cents for each dollar of modified adjusted gross income above $100,000 and disappears at $150,000. If you are married filing separately and lived with your spouse at any time during the year, you get no allowance.
Losses you can’t use aren’t lost. They carry forward to offset future rental profit, and any still suspended become deductible in the year you sell your entire interest to an unrelated buyer in a fully taxable sale. Real estate professionals, who spend more than 750 hours and more than half their working time in real property businesses in which they materially participate, can avoid the passive limits on rentals they materially participate in.
Bonus depreciation, 1031 exchanges and the step-up
The building must be depreciated over 27.5 years, but shorter-lived items can be written off much faster. Under the One Big Beautiful Bill Act of 2025, qualified property with a recovery period of 20 years or less, acquired and placed in service after January 19, 2025, gets a 100% first-year special depreciation allowance unless you elect out. In a rental, that covers items such as appliances, carpets and fences, but not the building. Pulling deductions forward this way also enlarges the ordinary-income recapture if you sell.
Depreciation defers tax rather than eliminating it. Trading into another investment property through a 1031 exchange carries your old basis, and the deferred recapture, into the replacement. The main way the recapture disappears is holding the rental until death: heirs receive a step-up in basis to market value and start a fresh depreciation schedule from it.
Illustrative numbers
A $400,000 rental depreciated for 10 years, then sold
- Cost basis
- Purchase price plus capitalized closing costs and improvements
- Land value
- The share of the basis allocated to land, which is never depreciable
- 27.5 years
- The recovery period for residential rental property; commercial buildings use 39
In the first and last years, prorate by month using the mid-month convention.
Purchase price with capitalized closing costs$400,000
Land share (25%), not depreciable$100,000
Annual depreciation ($300,000 ÷ 27.5)$10,909
Depreciation, January 2016 to January 2026$109,091
Adjusted basis at sale$290,909
Sale price after selling costs$500,000
Total gain$209,091
Of the $209,091 gain, $109,091 is unrecaptured Section 1250 gain taxed at no more than 25%, and the $100,000 of appreciation is taxed at 0%, 15% or 20%. At the full 25%, the recapture costs about $27,273, the price of a decade of deductions that lowered the owner’s taxable rental income.
At a glance
MACRS recovery periods for common rental property
| Property | Recovery period | Method |
|---|---|---|
| Residential rental building and structural parts | 27.5 years | Straight-line, mid-month |
| Commercial (nonresidential) building | 39 years | Straight-line, mid-month |
| Additions and improvements, such as a new roof | Same as the building | Straight-line, from when placed in service |
| Appliances, carpets and furniture | 5 years | 200% declining balance, half-year |
| Fences, roads and shrubbery | 15 years | 150% declining balance, half-year |
| Land, including clearing and grading | Not depreciable | None |
Put it in your plan
Rental depreciation in MoneyWhatIf
Turn on rent for a property card and enter the rental share, rent, land share and depreciation history. MoneyWhatIf excludes the land, depreciates the building straight-line over the residential or commercial recovery period, and subtracts years already taken on a property you owned before the plan; a partly rented property allocates building basis by its rental share. Depreciation lowers modeled taxable rental profit without taking cash, passive-loss rules can carry unused losses forward, and a later sale can release suspended losses and expose depreciation-related gain to the modeled recapture calculation. It does not determine cost segregation or real-estate-professional status.
Common questions
Rental depreciation FAQs
Do I have to depreciate my rental property?
In effect, yes. Your basis falls by the depreciation you were allowed or could have claimed, whichever is greater, so skipping it forfeits the deductions yet still leaves recapture tax on a sale. If you missed it, an amended return or an accounting-method change on Form 3115 can usually recover the deductions you were entitled to.
Do you depreciate the full purchase price or only the down payment?
The building’s full cost, however you paid for it. Basis includes money you borrow, so a rental bought with 20% down and a mortgage for the rest is depreciated on the building’s share of the whole price plus capitalized closing costs. The loan adds no depreciation of its own: interest is a separate rental expense, and points are deducted over the life of the loan.
When does depreciation start on a rental property?
When the property is placed in service, meaning ready and available for rent, even if no tenant has moved in. A house bought in April, repaired and ready on July 5, starts depreciating in July even if it isn’t rented until September. Under the mid-month convention, that first year counts 5.5 months.
Is depreciation recapture taxed at 25%?
At most 25%. The depreciation portion of a building’s gain, called unrecaptured Section 1250 gain, is taxed at your ordinary income rate when that rate is lower, so someone in the 12% bracket pays 12% on it. Gain on appliances and other personal property is recaptured at full ordinary rates, and the net investment income tax can apply on top at higher incomes.
What happens to depreciation when you inherit a rental property?
The previous owner’s depreciation is never recaptured. Your basis becomes the property’s fair market value on the date of death, so you allocate that value between land and building and start a new 27.5-year schedule on the building portion. If you sell soon after inheriting, there is usually little gain, and the sale counts as long-term however briefly you held it.