What is rental property depreciation and why does it matter?

Depreciation is a non-cash tax deduction that lets you recover the cost of your rental building over its IRS-defined useful life of 27.5 years. Even if your property is appreciating in value, you can still deduct depreciation, which offsets your taxable rental income. For a $300,000 depreciable basis, this means roughly $10,909/year in deductions — potentially saving $2,400–$3,600 in federal taxes annually depending on your bracket.

Why is land excluded from depreciation?

The IRS does not allow depreciation on land because land does not wear out, become obsolete, or have a finite useful life. Only the building structure and certain improvements can be depreciated. When you buy a property, you must allocate the purchase price between land and building. The county property tax assessment is a common method — use the land-to-building ratio from the assessment applied to your purchase price. For more precision, hire an appraiser.

What is depreciation recapture and how much tax will I owe?

Depreciation recapture is the tax you pay when you sell a rental property on the total depreciation you claimed (or were allowed to claim) during ownership. Under Section 1250, recaptured depreciation is taxed at your ordinary income rate, capped at 25% (the "unrecaptured Section 1250 gain" rate). For example, if you claimed $50,000 in depreciation over the years and sell the property, up to $50,000 of your gain is taxed at up to 25%, even if you qualify for the lower long-term capital gains rates on the remaining gain. This is why some investors use 1031 exchanges to defer both capital gains and depreciation recapture.

Can I accelerate depreciation beyond 27.5 years?

Yes — through a cost segregation study. A cost segregation engineer reclassifies components of the building that qualify for shorter depreciation periods: 5-year MACRS (appliances, carpeting), 7-year MACRS (certain fixtures), or 15-year MACRS (land improvements like parking lots and sidewalks). Accelerating more deductions into earlier years can significantly improve cash flow. Bonus depreciation rules (subject to current tax law — the Tax Cuts and Jobs Act schedules phase-outs through 2027) may allow immediate expensing of these shorter-life components. Consult a CPA or cost segregation specialist.

What if I also use the property personally?

If you rent the property for fewer than 15 days per year, it is treated as a personal residence and no depreciation is allowed. If you use it personally for more than 14 days or 10% of the rental days (whichever is greater), it is classified as a "vacation home" and depreciation deductions are limited proportionally to actual rental use. For a pure rental property with zero personal use, the full 27.5-year depreciation applies. Source: IRS Publication 527, "Personal Use of a Dwelling Unit."

When does depreciation start?

Depreciation begins when the property is "placed in service" — that is, when it is ready and available for rent. You do not need a paying tenant; the property just needs to be habitable and listed for rent. The IRS uses a mid-month convention for residential rental property: regardless of what day of the month you place it in service, you receive a half-month of depreciation for that month. Depreciation continues until you sell, dispose of, or stop renting the property.

Is this calculator applicable outside the United States?

No — this calculator uses IRS rules specific to US residential rental property (27.5-year MACRS, Publication 527). Other countries have different depreciation rules: Canada uses CCA (Capital Cost Allowance) at 4% for most rental buildings, the UK allows Structures and Buildings Allowance at 3%, and Australia uses effective life rules set by the ATO. If you own rental property outside the US, consult a local tax adviser.

Rental Property Depreciation Calculator

This calculator determines the annual depreciation deduction for US residential rental property under IRS MACRS GDS rules (Publication 527). Depreciation is one of the most valuable tax deductions available to rental property owners — it lets you deduct the cost of the building structure over 27.5 years, reducing your taxable rental income even when the property may be appreciating in value. Enter your purchase price, land value, and any capitalized closing costs or improvements to see your annual and monthly deduction. This tool is for educational purposes only — consult a qualified tax professional or CPA before filing.

Purchase Price

Total price paid for land and building

Land Value

Land cannot be depreciated — use assessor ratio or appraisal

Capitalized Closing Costs

Title, recording, legal fees added to basis (optional)

Capital Improvements

Major renovations added to depreciable basis (optional)

Marginal Tax Rate

Federal marginal rate for tax savings estimate

Annual Depreciation Deduction

$9,600.00

Monthly Depreciation

$800.00

Estimated Annual Tax Savings (22% rate)

$2,112.00

Depreciable Basis

$264,000.00

Depreciation Schedule

27.5 years (MACRS GDS)

For educational purposes only. Consult a qualified CPA or tax professional before filing. IRS Publication 527 governs residential rental depreciation rules.

How to use this calculator

1
Enter the purchase price
The total price paid for the property including the building and land. If you inherited or received the property, use the fair market value at the time you placed it in service as a rental.
2
Enter the land value
Land is never depreciable under IRS rules. Enter the assessed or appraised value of the land component only. A common approach is to use the county assessor's land-to-improvement ratio applied to your purchase price. If the land value is unknown, a rough estimate of 20–30% of purchase price is sometimes used — consult a CPA or appraiser for the correct figure.
3
Enter capitalized closing costs (optional)
Certain closing costs that are directly attributable to acquiring the property — such as title insurance, recording fees, and legal fees — can be added to your depreciable basis. Loan origination fees and prepaid property taxes are typically not capitalized. Leave at $0 if you are unsure.
4
Enter capital improvements (optional)
Major improvements that extend the useful life of the property (new roof, HVAC system, additions) are added to the depreciable basis. Routine repairs and maintenance are not capitalized and are expensed directly.
5
Enter your marginal tax rate
Your estimated federal marginal income tax rate as a percentage (e.g., 22, 24, 32). This is used to estimate the annual tax savings from the depreciation deduction. Check the current IRS tax brackets for your filing status.
6
Read your depreciation deduction
The calculator shows your annual and monthly depreciation deduction, your depreciable basis, estimated annual tax savings, and the total depreciation schedule length (27.5 years).

Formula

Depreciable Basis = Purchase Price − Land Value + Capitalized Closing Costs + Improvements

Annual Depreciation = Depreciable Basis ÷ 27.5

Monthly Depreciation = Annual Depreciation ÷ 12

Estimated Annual Tax Savings = Annual Depreciation × (Marginal Tax Rate ÷ 100)

Under IRS MACRS GDS (General Depreciation System), residential rental property is depreciated using the straight-line method over 27.5 years. The depreciable basis starts with the purchase price, subtracts the non-depreciable land value, and adds any capitalized closing costs and improvements. Dividing by 27.5 gives the annual deduction. Source: IRS Publication 527 — Residential Rental Property. Example: Purchase price $320,000, land value $60,000, closing costs capitalized $4,000 — depreciable basis = $264,000, annual depreciation = $264,000 ÷ 27.5 = $9,600, monthly = $800. At a 24% tax rate, estimated annual tax savings = $9,600 × 0.24 = $2,304.

Worked Example

Purchase Price: $320,000 Land Value: $60,000 Capitalized Closing Costs: $4,000 Capital Improvements: $0 Marginal Tax Rate: 24% Depreciable Basis = $320,000 − $60,000 + $4,000 = $264,000 Annual Depreciation = $264,000 ÷ 27.5 = $9,600.00/yr Monthly Depreciation = $9,600 ÷ 12 = $800.00/mo Estimated Annual Tax Savings = $9,600 × 0.24 = $2,304.00 The property depreciates over 27.5 years from the date it was first placed in service as a rental. If you sell before then, any depreciation claimed is subject to recapture (taxed up to 25%) under IRS Section 1250.

Frequently Asked Questions

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