How rental property depreciation works
The IRS treats a rental building as something that wears out, so it lets you deduct its cost a slice at a time — 27.5 years for residential rentals. The land under it never wears out, so it's never depreciated. That single split, building versus land, is where most self-prepared returns go wrong.
- Start with your basis: what you paid, plus most closing costs, plus improvements made before it became a rental.
- Remove the land. Your county's assessment usually shows land and improvement values separately; apply the same ratio to your basis.
- Divide by 27.5 for a full year's deduction.
- Adjust the first and last year with the mid-month convention: the property is treated as placed in service halfway through its month.
Worked example
You paid $350,000 plus $8,000 of closing costs; the land is worth $70,000. Basis for the building: $288,000. A full year's deduction is $288,000 ÷ 27.5 = $10,472.73. Placed in service in June, the first year gets 6.5 of 12 months: $5,672.73 — matching the IRS table's 1.97%.
If the home used to be yours
Converted your own home into a rental? Your basis is the lower of what you paid (plus improvements) or the home's market value on the day it became a rental — and the clock starts that day, not the day you bought it.
Why you shouldn't skip it
When you sell, the IRS taxes the depreciation you took — or could have taken — at up to 25%. Skipping the deduction doesn't avoid that tax; it just throws away the deduction. Improvements made while it's a rental get their own 27.5-year schedule starting the month they're finished.
