Depreciation reduces your taxable rental income every year you own a rental property. Missing it costs you money. Getting it wrong costs you more.
If you own a rental property and are not taking a depreciation deduction, you are overpaying your taxes every year. And if you are taking the deduction but calculating it incorrectly, the problem will surface when you sell, in the form of a recapture bill based on what you should have claimed rather than what you actually did.
Rental property depreciation is one of the most valuable tax deductions available to individual landlords. It is also one of the most commonly missed, miscalculated, and misunderstood.
Here is what it looks like.
What depreciation is and why the IRS allows it
Depreciation allows a landlord to deduct the cost of a rental property over its useful life, even when the property is appreciating in market value. The IRS treats the building as gradually wearing out over time, and allows you to recover that cost through annual deductions against your rental income.
The practical benefit is direct. Depreciation reduces your taxable rental income dollar for dollar, without requiring you to spend any additional money. For a property with $240,000 in building value, the annual depreciation deduction is approximately $8,727. At a 24% tax rate, that is roughly $2,094 in annual tax savings simply from claiming the deduction correctly.
One critical point before going further: the land your property sits on is never depreciable. The IRS does not allow depreciation on land because land does not wear out. Only the building and certain improvements are depreciable. Getting this distinction right from the start determines whether your depreciation calculation is correct.
How depreciation is calculated
The calculation for residential rental property uses the straight-line method over a 27.5-year recovery period under MACRS. The annual deduction is simply the depreciable basis divided by 27.5.
The depreciable basis is the portion of your purchase price allocated to the building, plus qualifying closing costs, minus the land value. Qualifying closing costs that add to basis include title insurance, recording fees, and legal fees related to the acquisition. They do not include loan costs, prepaid interest, or escrow amounts for taxes and insurance.
To separate land from building value, most landlords use the ratio from county assessor records, a purchase appraisal, or the allocation stated in the purchase contract. If the county assessor shows 80% building and 20% land, those percentages are applied to the purchase price.
Worked example: a landlord purchases a rental property for $300,000. County assessor records show 80% building and 20% land. Depreciable basis is $240,000. Annual depreciation is $240,000 divided by 27.5, which equals $8,727 per year.
The first and last year of depreciation are affected by the mid-month convention. In the year the property is placed in service and the year it is sold or retired, depreciation is calculated based on the half-month the property was in service, not the full year. A property placed in service in March gets 9.5 months of depreciation in year one, not a full 12 months.
What goes into the depreciable basis
Improvements made after purchase are not added to the original building’s depreciation schedule. They are treated as separate assets with their own depreciable basis and recovery period, depreciated independently from the original structure.
The distinction between a repair and an improvement matters here. A repair restores the property to its original condition and is deductible in full in the year paid. An improvement adds value, extends the useful life, or adapts the property to a new use, and must be capitalized and depreciated over its recovery period. Replacing a broken water heater is a repair. Installing a new central air conditioning system where none existed before is an improvement.
If you converted your personal residence to a rental, the depreciable basis is the lower of your adjusted cost basis or the fair market value at the time of conversion. This rule prevents landlords from converting personal losses into depreciation deductions.
If you inherited a rental property, the depreciable basis is generally the fair market value at the date of the prior owner’s death, which is often significantly higher than the original cost. This stepped-up basis can substantially increase the depreciation deduction available to the new owner.
Accelerating depreciation with cost segregation
Not everything inside a rental property needs to be depreciated over 27.5 years. Certain components have shorter recovery periods and can be depreciated much faster.
Appliances and carpeting are generally classified as 5-year property. Land improvements such as landscaping, parking lots, and outdoor lighting are generally 15-year property. A cost segregation study identifies these shorter-lived components within a property and separates them from the 27.5-year building, allowing the landlord to front-load deductions in the early years of ownership.
Under the One Big Beautiful Bill Act, 100% bonus depreciation is available for qualifying property acquired and placed in service after January 19, 2025. This means the 5-year and 15-year components identified in a cost segregation study can potentially be fully deducted in year one rather than spread over their recovery periods.
A cost segregation study typically costs between $5,000 and $15,000 depending on the size and complexity of the property. For properties with building values above $500,000, or for landlords with high taxable income who would benefit from accelerated deductions, the upfront cost is often recovered many times over through the tax savings generated.
Depreciation recapture when you sell: the part most landlords do not see coming
Every dollar of depreciation you take while owning a rental property reduces your adjusted basis. When you sell, that lower basis means a larger gain. And the portion of that gain attributable to the depreciation you claimed is taxed at a special rate, not at ordinary long-term capital gains rates.
This is called unrecaptured Section 1250 gain, and it is taxed at a maximum rate of 25% for residential rental property. This rate is higher than the 0%, 15%, or 20% long-term capital gains rates that apply to the remaining gain.
Worked example: a landlord purchased a property for $300,000, took $100,000 in depreciation over the years of ownership, and sells for $400,000.
Adjusted basis at time of sale: $300,000 minus $100,000 in depreciation equals $200,000. Total gain: $400,000 minus $200,000 equals $200,000. Of that $200,000 gain, $100,000 is unrecaptured Section 1250 gain taxed at up to 25%, and $100,000 is remaining capital gain taxed at long-term capital gains rates. At a 25% recapture rate and 15% capital gains rate, the estimated federal tax is $25,000 plus $15,000, totaling $40,000.
Two important points for planning purposes. First, the IRS will calculate recapture based on the depreciation that should have been taken, regardless of whether you actually claimed it. Not taking depreciation does not reduce your recapture liability when you sell. It just means you paid more tax each year you owned the property without getting any benefit at sale.
Second, a 1031 exchange defers both the capital gain and the depreciation recapture by rolling the entire basis into a replacement property. If the property is instead held until death and passed to heirs, they receive a stepped-up basis and the accumulated depreciation is effectively forgiven, which is one of the most significant tax planning opportunities in real estate ownership.
Passive activity rules and the $25,000 allowance
Rental income and losses are generally classified as passive under the tax rules under IRC Section 469, which means rental losses can normally only offset other passive income rather than ordinary income like wages or business income.
The exception that matters for most individual landlords is the $25,000 passive activity loss allowance. Landlords who actively participate in managing their rental, meaning they make management decisions such as approving tenants, setting rents, and authorizing repairs, can deduct up to $25,000 of rental losses against ordinary income each year.
This allowance phases out between $100,000 and $150,000 of adjusted gross income. Above $150,000, the allowance is fully phased out for most landlords and rental losses are suspended rather than currently deductible.
Landlords who qualify as real estate professionals, meaning they spend more than 750 hours per year in real estate activities and more than half of their total working time in those activities, can deduct rental losses without limitation against ordinary income.
Suspended passive losses that cannot be used in the current year carry forward to future years and are released in full when the property is sold in a fully taxable transaction.
The most common depreciation mistakes landlords make
Not taking depreciation at all is the most costly mistake, and it is more common than most people expect. Many landlords, particularly those who manage their own properties without professional help, either do not know depreciation is allowed or assume it is optional. It is not optional in a meaningful sense: the IRS will assume you took it when calculating recapture at sale regardless of whether you actually did.
Using the wrong depreciable basis by including land value is the second most common error. The entire purchase price is not depreciable, and incorrectly including the land value inflates the deduction and creates a compliance problem.
Using 39 years instead of 27.5 years is a mistake that typically happens when a landlord or their preparer applies the commercial property recovery period to a residential rental. The correct period for residential rental property, meaning property where 80% or more of gross rental income is from dwelling units, is 27.5 years.
Not depreciating improvements separately, forgetting about recapture when planning a sale, and not considering cost segregation for larger properties round out the most frequent errors in this area.
How to fix missed depreciation: Form 3115
If you have not been taking depreciation, or have been taking it incorrectly, you are not limited to amending every prior year return. The more efficient path for most landlords is to file Form 3115, Application for Change in Accounting Method, which allows you to claim all missed depreciation in a single year through a Section 481(a) adjustment.
There is no penalty for not having taken depreciation in prior years. The benefit of catching up is immediate: the Section 481(a) adjustment creates a deduction in the current year equal to all the depreciation you should have claimed since the property was placed in service. For a property held for ten years with $8,727 in annual depreciation, that is roughly $87,270 of additional deductions available in a single year through Form 3115.
Filing Form 3115 correctly requires professional help. The automatic consent procedures under Revenue Procedure 2002-9 make the process more accessible than it once was, but the technical requirements are specific enough that errors in the filing can create more problems than they solve.
Short-term rentals: Airbnb and VRBO
A property rented on Airbnb or VRBO is generally depreciated over 27.5 years if it is a residential structure, the same as a long-term rental. The key variable is personal use.
If you use the property personally for more than 14 days, or more than 10% of the total days it was rented at a fair rental price (whichever is greater), the property is subject to vacation home rules that limit the depreciation deduction to rental income. The deduction cannot create or increase a loss under those rules.
For short-term rental owners, keeping precise records of personal use days versus rental days throughout the year is essential to determining both the allowable depreciation and whether the vacation home limitations apply.
Frequently asked questions
Do I have to take depreciation on my rental property?
Technically you elect into depreciation, but you should always take it. The IRS will calculate depreciation recapture at sale based on the depreciation you should have taken, not what you actually claimed. Skipping the deduction costs you money each year you own the property without reducing your recapture liability when you sell.
How do I separate land value from building value for the depreciation calculation?
The most reliable methods are using the ratio from your county assessor’s property records, a purchase appraisal that allocates value between land and building, or the allocation stated in your purchase contract. Applying that ratio to your total purchase price gives you the depreciable building basis.
What is the recovery period for residential rental property?
27.5 years under MACRS GDS using the straight-line method. This applies to residential rental property, meaning property where 80% or more of gross rental income comes from dwelling units. Commercial rental property uses a 39-year recovery period.
What is unrecaptured Section 1250 gain and how is it taxed?
When you sell a rental property, the depreciation you have taken reduces your adjusted basis, creating a larger gain on sale. The portion of that gain equal to the total depreciation claimed is called unrecaptured Section 1250 gain and is taxed at a maximum rate of 25%, which is higher than standard long-term capital gains rates.
Can I avoid depreciation recapture?
You can defer it through a 1031 exchange, which rolls the entire basis including accumulated depreciation into a replacement property. If the property is held until death, heirs receive a stepped-up basis and the accumulated depreciation is effectively forgiven. There is no mechanism to permanently avoid recapture other than a stepped-up basis at death.
I have not been taking depreciation for several years. What should I do?
File Form 3115 to change your accounting method. This allows you to claim all missed depreciation in the current year through a Section 481(a) adjustment rather than amending every prior year return. The process requires professional help but is straightforward for a tax advisor familiar with real estate returns.
Does a cost segregation study make sense for my rental property?
Generally yes if your property has a building value above $500,000 or if you have high taxable income that would benefit from accelerated first-year deductions. A cost segregation study costs between $5,000 and $15,000 and identifies shorter-lived components that can be depreciated faster than 27.5 years, with 100% bonus depreciation potentially available on those components under current law.
Last updated: July 2026
Rental property depreciation is one of the few tax deductions that reduces your tax bill every year without requiring additional spending, but only if it is calculated correctly and claimed consistently. Every situation is different, and the right approach depends on your property basis, how long you have owned it, your income level, and your plans for the property. This article is intended as a general guide and should not be relied upon as tax advice for your specific circumstances. If you want to make sure your rental property depreciation is set up correctly or need to catch up on missed deductions, MyTaxFiler can help you work through it.
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