This rental property depreciation calculator shows you the annual deduction the IRS hands to every rental property owner, for free, without spending a dime beyond the purchase. Depreciation is the single largest tax advantage in real estate investing. A $300,000 property generates roughly $8,700 per year in phantom losses you can deduct against rental income. Over a 10-year hold, that is $87,000 in deductions you never had to write a check for. No other asset class offers anything close.
The 27.5-year straight-line schedule
The IRS assumes residential rental property wears out over 27.5 years, regardless of actual condition. A brand-new construction and a 1960s ranch house get the same timeline. Commercial property (offices, retail, warehouses) uses 39 years. The depreciation method is straight-line: equal deductions every year.
For a $240,000 depreciable basis, that is $8,727 per year. Every year. For 27.5 years. The deduction is automatic once the property is placed in service, and the IRS will recapture it at sale whether you claimed it or not. Skipping the deduction costs you money twice: once on the tax return, and again at the sale.
How to calculate depreciable basis
The depreciable basis is not the purchase price. It is the purchase price minus the land value, plus certain closing costs and capital improvements made before placing the property in service.
A worked example: you buy a duplex in Indianapolis for $350,000. The Marion County assessor allocates 20% to land, so the land value is $70,000. You spend $15,000 on a new roof and HVAC before your first tenant moves in.
Annual depreciation: $295,000 ÷ 27.5 = $10,727. At a 24% marginal tax rate, that saves you $2,575 in federal taxes every year. Over a 10-year hold, the cumulative deduction reaches $107,270.
The land allocation problem
Land cannot be depreciated. That makes the land-to-building ratio the most consequential number in the entire calculation, and it is also the most subjective. Three methods dominate:
- County tax assessor records. The cheapest approach. Most counties publish separate land and improvement values. The IRS generally accepts these, and they are easy to defend in an audit. The downside: assessor allocations can be outdated or reflect assessment methodology rather than market value.
- Purchase appraisal ratio. If your lender ordered an appraisal at closing, it may include a land-to-total breakdown. Apply that ratio to your purchase price. This is often the most accurate method for the specific property.
- Independent appraisal. Costs $300 to $500 but gives you a defensible, property-specific allocation. Worth it on properties above $400,000 where the difference between a 15% and 25% land allocation means $40,000+ in total deductions over the hold period.
The stakes are real. On a $400,000 property in Tampa, the difference between 20% land ($320,000 basis) and 30% land ($280,000 basis) is $1,455 per year in depreciation, or $14,550 over a 10-year hold. At a 24% tax rate, that is $3,492 in actual tax savings you leave on the table by using the wrong land number.
Depreciation by property type and tax bracket
The annual tax savings from depreciation vary dramatically based on the property type (which determines the schedule) and your marginal tax rate. Here is what a $300,000 depreciable basis produces:
| Property type | Schedule | Annual deduction | Tax savings (22%) | Tax savings (32%) | Tax savings (37%) |
|---|---|---|---|---|---|
| Residential rental | 27.5 years | $10,909 | $2,400 | $3,491 | $4,036 |
| Commercial | 39 years | $7,692 | $1,692 | $2,462 | $2,846 |
| Residential w/ cost seg (5-yr component) | 5 years | $60,000 | $13,200 | $19,200 | $22,200 |
The cost segregation row assumes $300,000 of personal property reclassified to a 5-year life without bonus depreciation. With 20% bonus depreciation (the 2026 rate, phasing to zero in 2027), the first-year deduction is still larger than straight-line alone. Higher tax brackets benefit more from depreciation in absolute dollar terms, which is why high-income investors with real estate professional status treat depreciation as a primary investment thesis, not a side benefit.
Depreciation recapture: the exit tax nobody budgets for
Depreciation is not free money. It is a loan from the IRS that comes due when you sell. Every dollar of depreciation you claimed (or could have claimed) gets taxed at a flat 25% rate upon sale. This is called depreciation recapture, and it sits on top of your capital gains tax.
A worked example: you held a property for 10 years, claiming $10,000 per year in depreciation. Total depreciation: $100,000. When you sell, you owe $25,000 in recapture tax, plus capital gains tax on the remaining profit. If the property appreciated from $300,000 to $450,000 and you are in the 15% long-term capital gains bracket, your total tax bill looks like this:
| Component | Amount | Tax rate | Tax owed |
|---|---|---|---|
| Depreciation recapture | $100,000 | 25% | $25,000 |
| Capital gain (above recapture) | $150,000 | 15% | $22,500 |
| Total | $250,000 | $47,500 |
Recapture changes the exit math significantly. Investors who model their returns without recapture are overstating after-tax IRR by 2 to 4 percentage points on a typical 10-year hold. Always model the sale with recapture included, or you are lying to yourself about performance. Use our rental ROI calculator to model the full picture.
Cost segregation: accelerating the timeline
Standard depreciation spreads deductions evenly over 27.5 years. A cost segregation study breaks the property into components and assigns shorter lives to non-structural elements. Carpeting, light fixtures, appliances, landscaping, and paving can qualify for 5, 7, or 15-year depreciation schedules. Combined with bonus depreciation, this front-loads massive deductions into year one.
On a $500,000 residential rental in Denver, a cost segregation study might reclassify $80,000 to $120,000 of components to shorter lives. With 20% bonus depreciation (2026 rate), that generates $16,000 to $24,000 in first-year bonus deductions on the reclassified portion, on top of the standard annual deduction on those shorter schedules and the 27.5-year deduction on the remaining basis.
The study itself costs $3,000 to $10,000 depending on property size and complexity. The general rule: cost segregation makes sense on properties with a depreciable basis above $300,000, when you have sufficient passive income to absorb the deductions (or real estate professional status to use them against W-2 income), and when you plan to hold for at least 5 years. On a $200,000 single-family rental with limited passive income, the study fee eats most of the incremental benefit.
Passive activity rules and the $25,000 allowance
Depreciation creates passive losses. Passive losses can only offset passive income, with one exception: the $25,000 special allowance for active participants with AGI below $100,000.
Here is how it plays out in practice. You own one rental property in Phoenix generating $8,000 in depreciation and $3,000 in net rental income after cash expenses. That creates a $5,000 passive loss. If your AGI is $85,000 and you actively manage the property (approve tenants, set rents, authorize repairs), you can deduct that $5,000 against your W-2 income. Your tax return shows $5,000 less in taxable income.
The allowance phases out $1 for every $2 of AGI between $100,000 and $150,000. At $130,000 AGI, you can only deduct $10,000 in passive losses. At $150,000 and above, the allowance disappears entirely. Your depreciation losses pile up as suspended passive losses, usable only against future passive income or upon sale of the property.
Real estate professional status (REPS) removes the passive activity limitation entirely. Qualifying requires 750+ hours per year in real estate activities and more time in real estate than any other profession. REPS lets you deduct all rental losses, including depreciation, against any income. This is the mechanism behind the "zero tax bill on $300K income" stories you see on social media. It is real, but the qualification bar is high and the IRS scrutinizes these claims aggressively.
The 1031 exchange escape hatch
A 1031 exchange lets you sell a rental property and reinvest the proceeds into a like-kind replacement property while deferring both capital gains tax and depreciation recapture. The recapture liability does not disappear. It carries forward to the replacement property, reducing your depreciable basis on the new asset.
The power move: keep exchanging into larger properties throughout your investing career, deferring all recapture along the way. When you die, your heirs receive a stepped-up basis, and the accumulated recapture liability vanishes. This is not a loophole. It is how the tax code is written, and it is the reason many of the largest real estate portfolios in the country have never paid recapture tax on decades of depreciation deductions.
The 1031 exchange has strict rules: 45-day identification period, 180-day closing window, equal or greater value and debt, and a qualified intermediary must hold the funds. Miss any deadline and the entire exchange fails, triggering the full tax bill. Plan the exit strategy before you buy, not after you list.
Why depreciation is the real reason investors buy rental property
Cash flow gets all the attention. Appreciation gets all the excitement. Depreciation does the actual heavy lifting on the tax return. A property that breaks even on cash flow but generates $10,000 in annual depreciation saves a 32% bracket investor $3,200 per year in taxes. Over a 10-year hold, that is $32,000 in tax savings on a property that "did not make any money."
Combine depreciation with mortgage paydown, modest appreciation, and the occasional rent increase, and the total return on a "break-even" rental property can reach 12% to 15% annualized. The cash flow calculator shows you the monthly picture. The depreciation calculator shows the tax picture. You need both to see the full return.
Stocks do not depreciate. Bonds do not depreciate. REITs pass through depreciation but with less control and lower deductions per dollar invested. Direct ownership of rental property is the only common investment vehicle that lets you take a non-cash deduction against income for nearly three decades. That structural advantage is why the tax code, intentionally or not, favors real estate investors over every other type of investor.
Worked example: full depreciation lifecycle
You buy a single-family rental in Charlotte for $320,000. The Mecklenburg County assessor allocates 25% to land. You spend $10,000 on capital improvements before the first tenant.
You hold for 12 years, claiming $109,091 in total depreciation. The property appreciates to $480,000. At sale:
| Item | Amount |
|---|---|
| Sale price | $480,000 |
| Adjusted basis (cost minus depreciation) | $220,909 |
| Total gain | $259,091 |
| Recapture portion (taxed at 25%) | $109,091 = $27,273 tax |
| Capital gain portion (taxed at 15%) | $150,000 = $22,500 tax |
| Total tax at sale | $49,773 |
During the hold, you saved $109,091 × 24% = $26,182 in federal taxes from depreciation deductions. At sale, you pay back $27,273 in recapture. The net cost of recapture above the tax savings is only $1,091, and you had the use of that money for 12 years. Depreciation is not free, but it is very close to free when you account for the time value of the deductions. Model your own scenario with the compound interest calculator to see what reinvesting the annual tax savings produces over your hold period.
Frequently asked questions
How does rental property depreciation work?
The IRS lets you deduct the cost of a residential rental property over 27.5 years, straight-line. You divide the depreciable basis (purchase price minus land, plus capital improvements) by 27.5 to get your annual deduction. A $200,000 depreciable basis yields $7,273 per year. That deduction offsets rental income on your taxes, even though you never wrote a check for it. Commercial property uses 39 years instead.
What is the depreciable basis of a rental property?
Depreciable basis = purchase price minus the value of the land, plus closing costs allocated to the building, plus any capital improvements made before placing the property in service. If you buy for $300,000 and the land is worth $60,000, your depreciable basis is $240,000. The IRS does not let you depreciate land because land does not wear out. Getting the land allocation right is the single most important step.
How do I determine the land value for depreciation?
Three common methods: use the county tax assessor's breakdown (cheapest, most defensible), hire an independent appraiser ($300 to $500), or use the ratio from a recent purchase appraisal. Assessor records typically allocate 15% to 30% of total value to land. The IRS accepts any reasonable, consistently applied method. Lower land value means higher depreciable basis and bigger deductions, but being too aggressive invites audit scrutiny.
What is depreciation recapture and how much tax will I owe?
When you sell a rental property, the IRS taxes all the depreciation you claimed (or could have claimed) at a flat 25% rate. If you took $100,000 in total depreciation deductions over your hold period, you owe $25,000 in recapture tax on top of any capital gains tax. Recapture is not optional. Even if you never claimed the deduction, the IRS recaptures it anyway. The only clean escape is a 1031 exchange.
What is a cost segregation study?
A cost segregation study reclassifies parts of your building (carpet, appliances, landscaping, certain fixtures) from the 27.5-year schedule to 5, 7, or 15-year schedules. This front-loads deductions into the early years. On a $500,000 property, a study might reclassify $100,000 to shorter lives, accelerating deductions through shorter depreciation periods plus any remaining bonus depreciation. Studies cost $3,000 to $10,000 and generally make sense on properties above $300,000.
Can I use depreciation losses to offset W-2 income?
Only if your AGI is below $100,000 and you actively participate in managing the property. The IRS allows up to $25,000 in passive losses against active income under these conditions. The allowance phases out between $100,000 and $150,000 AGI, reaching zero at $150,000. Above that threshold, depreciation losses can only offset other passive income. Real estate professional status (750+ hours) removes this limitation entirely.
Does a 1031 exchange eliminate depreciation recapture?
It defers recapture, it does not eliminate it. In a 1031 exchange, the recapture liability carries forward to the replacement property. Your new depreciable basis is reduced by the deferred gain and accumulated depreciation. If you keep exchanging until death, your heirs get a stepped-up basis and the recapture effectively disappears. This is the single most powerful estate planning tool in real estate.
When does depreciation start on a rental property?
Depreciation begins when the property is placed in service, meaning ready and available for rent. Not when you close, not when a tenant moves in. If you buy on March 15 and the property is rent-ready that day, you depreciate from March. The first and last year use a mid-month convention: you get half a month of depreciation for the month you start and the month you sell or stop renting.