Rental Property Depreciation Basics Every Landlord Should Know

Answer

Understanding depreciation on rental property can help landlords lower taxable income by spreading the cost of a building over its useful life. Rather than deducting the full purchase price at once, the IRS lets you claim an annual depreciation expense, reflecting wear and tear and obsolescence.

Under the Modified Accelerated Cost Recovery System (MACRS), residential real estate depreciates over a 27.5‑year period. To calculate your annual deduction:

• Determine your basis: purchase price plus closing costs and capital improvements, minus land value.
• Separate land and building values (land is not depreciable).
• Apply the MACRS percentage for residential rental property in year one and subsequent years.

For example, if your building basis is $275,000, you divide by 27.5 to get a $10,000 annual depreciation deduction. In year one, a half‑year convention applies, so you’d claim roughly $1,818 (10,000 × 0.1818). Your accountant or tax software typically uses the IRS tables in Publication 527.

Other key points:

• Improvements vs. repairs: Capital improvements (new roof, addition) add to basis and depreciate over 27.5 years. Repairs (paint, minor fixes) are deductible in the year incurred.
• Form 4562: Use this form to report depreciation and amortization when filing your return.
• Recapture: When you sell, depreciation reduces your adjusted basis and can trigger “recapture” taxed at up to 25% on the gain attributable to depreciation.

Depreciation can be one of the largest deductions for rental owners. Keeping clear records of purchase documents, improvement invoices, and annual depreciation schedules ensures accuracy and audit readiness. Many landlords use property management software or work with a CPA to automate these calculations.

While depreciation offers significant tax benefits, it also affects your basis and gain on sale. It’s advisable to consult a licensed CPA or tax attorney to verify calculations, optimize deductions, and understand implications for your specific situation.