Rental property depreciation: the deduction you get for your building slowly getting older

By Tom, CPA · Updated October 25, 2026

TL;DR: Residential rental buildings are depreciated straight-line over 27.5 years using the mid-month convention. Land is never depreciated, so you split the purchase price first. Depreciation lowers taxable rental income every year and lowers your basis too, and that comes back as unrecaptured Section 1250 gain, taxed at up to 25%, when you sell. You owe it whether or not you claimed the deduction.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Depreciation is the tax code's most charming fiction. Your rental may be gaining value every year, and the IRS still lets you deduct a slice of the building's cost as if it were slowly crumbling. Lavish Larry loves it because it shrinks his taxable rental income. Frugal Fran loves it because she has read the part about recapture and knows to set some cash aside.

This guide covers the core rules for residential rental property, from IRS Publication 527, as of Oct 2026.

CPA Warning Label: "Allowed or allowable" means the IRS reduces your basis by depreciation you could have claimed, even if you didn't. Skipping it never helps.

Depreciable basis

You can depreciate property you own, use in a rental (or business) activity, and that has a determinable useful life of more than a year. Depreciation starts when the property is placed in service, meaning ready and available for rent, not when you buy it or when the first tenant arrives.

Your starting basis is generally your cost, including certain settlement costs such as legal and recording fees, title insurance, transfer taxes, and surveys. Costs like loan fees, points, and insurance premiums are handled differently: they're amortized, deducted, or not part of basis. Pub 527 lists which settlement costs go where.

Add the cost of improvements, which better, restore or adapt the property, such as a new roof, an addition or a full kitchen remodel. Improvements are depreciated separately, usually over 27.5 years for structural work. Repairs that keep the property in ordinary operating condition, such as fixing a leak or repainting a room, are generally deducted in the year paid.

If you convert your former home into a rental, the depreciable basis is the lesser of the property's fair market value or your adjusted basis on the date of conversion. A home that has dropped in value doesn't produce a depreciation deduction based on what you originally paid.

27.5-year schedule

Residential rental property placed in service after 1986 is depreciated under MACRS using the General Depreciation System (GDS): 27.5 years, straight-line, mid-month convention. The mid-month convention treats the property as placed in service in the middle of the month, so the first and last years are partial.

Annual percentages for a property placed in service in a given month (first year shown; middle years are about 3.636%):

Other common assets in a rental, from Pub 527:

• Appliances, carpeting and furniture used in a residential rental: 5 years.
• Land improvements such as fences, driveways, roads and shrubbery: 15 years.
• The Alternative Depreciation System (ADS) uses 30 years for residential rental property placed in service after 2017 and applies in some cases, such as when an electing real property trade or business opts out of the business interest limit.

Personal property and land improvements may also qualify for bonus depreciation. As of Oct 2026, 100% bonus depreciation is available for qualified property acquired after January 19, 2025, per IRS Notice 2026-11. The building itself isn't eligible. See cost segregation.

Depreciation is reported on Form 4562 in the first year and then flows to Schedule E.

Land allocation

Land is not depreciable. It doesn't wear out. Before you depreciate anything, you have to split the purchase price between land and building.

Pub 527 describes allocating cost based on fair market value at purchase, and notes that if you can't determine those values, you can use the ratio from your real estate tax assessment.

Illustration: You buy a rental for $400,000. The county assessment values the land at $60,000 and the improvements at $180,000, a total assessed value of $240,000. Land share: 60/240 = 25%. Building share: 75%. Depreciable building basis: $300,000. Allocated land: $100,000.

Assessment ratios can vary a lot, especially in expensive coastal markets where land is most of the value. An appraisal that separately values the land and building can be better support than the assessment when the assessment is clearly off. Overstating the building share inflates deductions and invites questions. Understating it leaves money on the table for 27.5 years.

Recapture at sale

Every dollar of depreciation reduces your adjusted basis. When you sell, the gain is measured from that lower basis, so more of the sale price is taxable gain.

• The portion of gain attributable to straight-line depreciation on residential buildings is unrecaptured Section 1250 gain, taxed at a maximum of 25% (IRS Topic 409).
• Depreciation on personal property, such as appliances or cost-segregated components, is generally recaptured as ordinary income under Section 1245.
• Remaining gain is generally long-term capital gain at 0%, 15% or 20% if held more than a year, and the 3.8% net investment income tax may apply above the MAGI thresholds ($200,000 single, $250,000 joint).

The "allowed or allowable" rule: basis is reduced by the greater of depreciation you deducted or the depreciation you were entitled to deduct. Forgetting to claim depreciation for years means you lose the deduction and still pay recapture. Remedies exist for some missed depreciation, such as an accounting method change, but they take work.

Practical habits that save headaches: keep a fixed-asset list for each property showing the item, date placed in service, cost, method and life. Add every improvement when it happens, not at tax time. When you replace something, such as an old roof, note the disposal, because the undepreciated basis of a retired component may be deductible. And keep the list with the property's file forever, or at least until several years after you sell. Your future self, staring at a sale closing statement, will thank you.

Ways investors defer or avoid recapture include a 1031 exchange, which carries the deferred gain into the replacement property, and holding until death, when heirs generally receive a basis equal to fair market value under current law.

Example

Illustration from IRS Pub 527: A rental with a building basis of $160,000 placed in service in February has a first-year rate of 3.182%, so first-year depreciation is about $5,091. Each full year after that is about 3.636%, or roughly $5,818.

Our extended illustration: Fran buys a $400,000 rental, allocates $300,000 to the building, and places it in service in January. Over 10 years she claims about $108,600 of depreciation: 3.485% in year one, then about 3.636% a year. She then sells for $520,000 net of selling costs.

During those 10 years the deductions lowered her taxable rental income, possibly at a 22% or 24% marginal rate, and the money stayed invested. At sale, some of it comes back at up to 25%. Whether that's a good trade depends on her brackets in both periods and whether passive loss rules let her use the deductions; see passive activity loss rules. Early retirees who sell in a low-income year may land in lower brackets on part of the gain.