Depreciation Basics for Rental Property Owners

Depreciation is one of the most valuable tax concepts for rental property owners, and also one of the most misunderstood. This is general educational information, not tax advice — a tax professional should confirm how it applies to your specific situation.

The basic concept

Depreciation lets you deduct a portion of a rental property's cost each year, spread out over a set period, to account for the building's wear and eventual need for replacement — even though you're not actually spending that money each year. It's a non-cash deduction that can meaningfully reduce your taxable rental income.

The 27.5-year residential schedule

Under current IRS rules (MACRS), residential rental property is commonly depreciated over 27.5 years. This is a widely cited, stable figure, though tax law can change — confirm current rules apply when you file.

Land isn't depreciable

Only the building itself can be depreciated — the land it sits on cannot, since land doesn't wear out. When calculating depreciation, the purchase price typically needs to be allocated between land and building value, often based on a property tax assessment's breakdown.

Why it matters even if you're profitable

Depreciation can create a paper loss on a rental property that's actually generating positive cash flow, which can offset other taxable income depending on your situation. It's a significant reason rental real estate is often tax-advantaged compared to other investments.

Depreciation recapture on sale

When you eventually sell a depreciated property, the IRS generally requires recapturing some of that depreciation as taxable income at sale — meaning the benefit isn't entirely free, it's partly deferred. This is a significant enough factor that it's worth discussing with a tax professional well before a planned sale.