TAXES
Rental property depreciation, explained
You deduct the cost of a rental building (never the land) over 27.5 years, starting the month it's ready for rent. The first and last years are partial under the mid-month convention. On a $288,000 building basis, that's about $10,473 a year. When you sell, depreciation you took — or could have taken — is taxed at up to 25%.
Depreciation is the largest deduction most small landlords have, and the one most often done wrong — or skipped. Here's how it works.
The idea
The IRS treats a rental building as something that wears out, so it lets you deduct its cost a little each year. Residential rental buildings are depreciated over 27.5 years using the straight-line method and the mid-month convention. Land is never depreciated.
Step 1: Your basis
Start with what you paid, then adjust:
- Add most settlement and closing costs (title, recording fees, transfer taxes, legal fees) — not loan costs like points.
- Add improvements made before the home became a rental.
- Subtract the land. Your property tax assessment usually splits land and improvements; applying that ratio to your cost is a common, defensible method.
Step 2: The yearly amount
Divide the building basis by 27.5.
Worked example
Price $350,000 + $8,000 closing costs − $70,000 land = $288,000 building basis. A full year: $288,000 ÷ 27.5 = $10,472.73.
Step 3: The first year (mid-month convention)
The IRS treats the property as placed in service in the middle of its month. So the first year gets the remaining months plus a half. Placed in service in June: 6.5 months ÷ 12 of a full year — $5,672.73 in the example, which matches the IRS table's 1.97%. The schedule then runs a full amount each year, with a partial final year.
The depreciation calculator builds the whole schedule for any month and year.
If it used to be your home
When you convert your own home into a rental, your depreciable basis is the lower of:
- your adjusted basis (what you paid plus improvements), or
- the home's fair market value on the day it became a rental
— minus the land in either case. Depreciation starts that day.
Improvements made while it's a rental
A new roof, a remodeled kitchen, or a new HVAC system while it's rented is an improvement with its own 27.5-year schedule (some components, like appliances, can have shorter lives). Small purchases may qualify for an easier path: Under the de minimis safe harbor, you can elect to deduct items costing $2,500 or less per invoice or item in the year you buy them, instead of depreciating them.
What happens when you sell
Depreciation you claimed (or could have claimed) after May 6, 1997 can't be excluded. That part of the gain is taxed when you sell, at a maximum federal rate of 25%.
Not claiming depreciation doesn't avoid this — the IRS taxes depreciation allowed or allowable. So skipping it gives up the deduction without avoiding the tax. If you missed depreciation in past years, a tax professional can usually help you catch up.
Where it goes on your return
Schedule E, line 18 each year, and Form 4562 in the year the property is placed in service (and years you add improvements).
Sources: IRS Publication 946, Table A-6, IRS Publication 527. General information, not tax advice.
Common questions
How many years do you depreciate a rental property?
Residential rental buildings are depreciated over 27.5 years using the straight-line method and the mid-month convention.
Can you depreciate land?
No. Land doesn't wear out, so it's never depreciated. Only the building and improvements are.
When does depreciation start on a rental?
When the property is placed in service — ready and available for rent — not when you bought it or when the first tenant moved in.
General information, not legal or tax advice. Where we state a law, we link the statute and re-check it on a schedule; your city or county can add rules of its own.