Depreciation is the single largest paper deduction most landlords claim — and the one most likely to be calculated wrong, since it depends on separating your property's value into pieces the IRS treats completely differently.
Why You Depreciate a Rental at All
The IRS treats a rental building as an asset that wears out over time, and lets you deduct a portion of its cost each year as a business expense — even though, in reality, most well-maintained properties appreciate rather than lose value. This mismatch between the tax treatment and the actual market is exactly what makes depreciation such a valuable deduction for landlords.
The 27.5-Year Schedule
Residential rental property is depreciated on a straight-line basis over 27.5 years, meaning you deduct roughly the same amount every year for that period (commercial property uses a longer, 39-year schedule instead). The deduction starts the month the property is placed in service as a rental — not the month you bought it — and stops once you've fully depreciated the building or sell the property.
Land Doesn't Depreciate — Splitting Basis Correctly
You can only depreciate the building itself, not the land underneath it, since land theoretically never wears out. This means your first calculation is splitting the purchase price between land and building value, typically using the county property tax assessment's allocation percentage as a reasonable, defensible starting point. Getting this split wrong — claiming too much building value — is one of the most common errors the IRS flags on rental returns.
Cost Segregation for Larger Improvements
Certain components of a rental property — appliances, carpeting, some fixtures — can be depreciated on a much shorter schedule than the building itself, sometimes over just 5 or 15 years. A cost segregation study identifies these components separately, front-loading deductions into earlier years rather than spreading them evenly over 27.5 years. This is usually only worth the study's cost for larger or more valuable properties.
The Recapture Bill Waiting When You Sell
Every dollar of depreciation you claim reduces your cost basis in the property, which increases your taxable gain when you eventually sell. That accumulated depreciation is then taxed separately as 'unrecaptured Section 1250 gain,' at a rate of up to 25% — regardless of whether you actually claimed the depreciation or simply failed to. The IRS assumes you took the deduction ('allowed or allowable'), so skipping it doesn't avoid the recapture tax later; it just means you paid more tax along the way for nothing.
Frequently asked questions
Can I depreciate a rental property I inherited?
Yes — your depreciable basis is generally the property's fair market value on the date of the previous owner's death (a stepped-up basis), not what they originally paid for it.
What happens to unused depreciation if my rental shows a loss?
Rental losses are often limited by passive activity loss rules unless you qualify as a real estate professional; disallowed losses typically carry forward to offset future rental income or gain on sale.
Do I have to claim depreciation every year?
You're not legally required to, but skipping it doesn't protect you from the recapture tax at sale, so there's rarely a reason not to claim the full deduction you're entitled to.