Rental property depreciation is the largest deduction most landlords claim, and it is also the most misunderstood, because the schedule looks simple and the rules behind it are not. The building writes off over 27.5 years, straight-line, on the part of the purchase price allocated to the building, excluding land, which is never depreciated. The components inside and around the building — appliances, carpet, fencing, paving — write off over 5, 7, and 15 years, and separating them is the work of a cost segregation study. This guide builds a rental schedule from the purchase price, explains the conventions and the traps, and shows what happens to the depreciation when the property is sold.

Step one: the depreciable basis, and the land exclusion

The depreciable basis of a rental property is the cost of the building, not the cost of the property. When a rental property is bought, the purchase price buys two things: land, which does not wear out and is never depreciated, and a building, which does. Only the building portion is depreciated, so the first step in every rental schedule is the allocation between the two. The allocation is commonly taken from the property tax assessment, which separates land value from improvement value, or from an appraisal, and it must be reasonable and supportable, because it decides the deduction for the next 27.5 years. A $300,000 purchase with land valued at $60,000 has a depreciable basis of $240,000, before closing costs that are added to basis and any costs that are expensed separately.

Closing costs need the same care as the price. Costs that are part of acquiring the property, such as title insurance, recording fees, and transfer taxes, are generally added to basis and depreciated with the building or allocated to land as appropriate. Costs that are financing costs, such as loan origination points, are generally amortised over the loan term, not depreciated with the building. Costs that are current expenses, such as property taxes prorated to the purchase date or insurance prepaid, are handled separately. The settlement statement is the source document, and each line must be classified before the schedule is built, because a cost added to basis in error inflates the deduction for decades, and a cost expensed in error understates it in the year of purchase. A tax professional should review the classification on the first rental return, when the schedule is created, because that is the cheapest time to get it right.

Improvements made after purchase are added to basis and depreciated over their own recovery periods, which may differ from the building. A new roof, a furnace replacement, or an extension is a capital improvement, added to basis and written off over the period for that component — generally 27.5 years for a building component, 15 years for a land improvement such as paving, 5 years for an appliance. Repairs that merely keep the property in working order, such as patching drywall or fixing a leaking tap, are deducted in full in the year paid. The boundary between the two is where audits live, and it is decided by the nature of the work, not by its price: a $180 water heater replacement can be a repair, and a $14,000 roof is an improvement, and invoices that describe the work, not just the total, are the evidence that supports the classification.

Step two: the 27.5-year straight-line schedule

Residential rental property is depreciated straight-line over 27.5 years under MACRS, using the General Depreciation System, with the mid-month convention. The annual deduction, once the schedule is running, is the depreciable basis divided by 27.5. On a $240,000 basis, that is $8,727.27 a year. On a $150,000 basis, it is $5,454.55 a year. The rate is about 3.636 percent of basis per full year, and it is the same every full year, because straight-line charges evenly. The schedule is simple to build and simple to check: multiply the annual charge by the number of full years, adjust the first and last years for the convention, and the total must equal the basis. The Depreciation Calculator straight-line schedule shows the same pattern for any asset; the rental schedule is that pattern with a prescribed life and a prescribed convention.

The 27.5-year period applies to residential rental property, which is generally a building where 80 percent or more of the gross rental income comes from dwelling units. Nonresidential real property, such as an office or a warehouse, uses 39 years, straight-line, under the same system. Property used for short-term rentals, with average stays of 30 days or fewer, can be treated differently, and is often depreciated over 39 years as nonresidential or transient property, which is a classification question that must be settled before the schedule is built, because the difference between 27.5 and 39 years changes the annual deduction by about 30 percent. Mixed-use property, where the owner lives in one unit and rents the others, depreciates only the rental portion, allocated by a reasonable method such as square footage, and the personal portion is never depreciated.

Basis divided by 27.5. First and last years are prorated by the mid-month convention.

The mid-month convention and the 28th year

The mid-month convention treats a property as placed in service at the midpoint of the month in which it is placed in service. A property placed in service in July is treated as in service for half of July, so its first-year deduction is about 5.5 months out of 12, or 45.8 percent of a full year. A property placed in service in January is treated as in service for 11.5 months, so its first year is 95.8 percent of a full year. The convention exists because properties are bought throughout the year, and the tax system averages the timing by months rather than tracking the exact day. The schedule therefore runs into a 28th calendar year: 27.5 years of recovery, starting mid-month, ends mid-month in the 28th year, with the final year taking the remaining fraction. The total over the whole schedule equals the basis, exactly, and the first and last years are the only partial ones.

Placed in service is a term of art: it means the property is ready and available for its assigned function, not the date the deed was signed or the date the first tenant moved in. A property bought in December but not ready for tenants until February is placed in service in February, and the schedule starts then. A property bought as a rental and rented immediately is placed in service on the purchase date, or the date it is ready, whichever is the operative fact. The date matters because it sets the convention year and the first-year fraction, and it is the date the return should state. Keep the closing documents, the readiness evidence, and the first lease together, because they prove the date if it is ever questioned, and the date is the foundation of the next 28 years of deductions.

Components: 5, 7, and 15-year property

A building is not one asset for depreciation purposes, even though it is bought as one. Inside it are appliances, carpet, and fixtures that wear out in 5 or 7 years, and outside it are land improvements — paving, fencing, sidewalks, landscaping, site lighting — that wear out in 15 years. Each component has its own recovery period under MACRS, and each is depreciated on its own schedule, generally with the 200 percent declining balance method for 5- and 7-year property and 150 percent for 15-year property, under the half-year convention. An appliance bought for $1,200 is 5-year property: its MACRS deductions over six calendar years are $240, $384, $230, $138, $138, and $69, totalling $1,200. A fence costing $6,000 is 15-year property: its deductions follow the 15-year table, front-loaded less aggressively, over sixteen calendar years. The building shell itself — foundation, structure, roof, and the core systems — stays on the 27.5-year straight-line schedule.

The practical consequence is that a new rental property has several schedules running at once, at different rates, and the total deduction in the early years is higher than the building schedule alone suggests, because the short-life components write off quickly. That front-loading is legitimate and valuable, and it is also the reason the purchase price allocation matters beyond the land split: the more cost that is supportably allocated to short-life components, the larger the early deductions, and the allocation must be supportable by invoices, appraisals, or an engineering study, not by assertion. Components replaced during ownership follow the same rules: a new appliance is new 5-year property, a new fence is new 15-year property, and each starts its own schedule in the year placed in service. The old component, if it still had book value, is disposed of, and any remaining basis is handled under the disposition rules.

Cost segregation: what it does and when it pays

A cost segregation study is an engineering-based analysis that identifies and reclassifies building components into shorter recovery periods, with supportable cost allocations. Engineers and tax specialists examine construction documents, contractor invoices, and the building itself, and allocate costs to 5-year personal property, 7-year property, 15-year land improvements, and the remaining 27.5-year building. A study typically reclassifies 20 to 30 percent of a residential property depreciable basis into shorter-life buckets, though the fraction varies widely with the property type: a furnished short-term rental reclassifies more than an unfurnished long-term rental, because it contains more personal property. The reclassified cost is then depreciated on the short schedules, and, where bonus depreciation applies, the 5-, 7-, and 15-year property can be written off entirely in the first year, because bonus depreciation reaches property with a recovery period of 20 years or less.

The arithmetic is powerful and the caveats are real. On a $320,000 basis, reclassifying 25 percent, or $80,000, into short-life property and writing it off in year one under 100 percent bonus depreciation gives an $80,000 first-year deduction against $11,636 under the straight-line schedule alone, a difference of about $68,000 in the first year, worth the taxpayer marginal rate in tax saved that year, with the offsetting cost that the basis is reduced and future deductions are lower, and that recapture applies on sale. The study itself typically costs $3,000 to $8,000, which is why it rarely pays on a single small property but commonly pays once a portfolio crosses roughly $500,000 in depreciable basis, or where a large purchase in a high-income year makes the first-year deduction especially valuable. The study must be done by qualified professionals, the allocations must be supportable, and the results must be reported consistently; an aggressive study that cannot be defended is worse than no study, because it creates audit exposure on every year it touches.

Bonus depreciation interacts with cost segregation directly, and the interaction is the point. Without bonus depreciation, the reclassified property writes off over 5, 7, or 15 years, which is still faster than 27.5 years, but not immediate. With 100 percent bonus depreciation for qualifying property acquired after 19 January 2025, the reclassified property writes off in year one, which is the acceleration that makes the study valuable. The restoration of 100 percent bonus depreciation is permanent under current law, but tax law changes, and the eligibility of specific property, the placed-in-service dates, and the state treatment — some states decouple from federal bonus depreciation — must all be confirmed for the year in question. State decoupling is a trap for the unwary: a deduction allowed federally may be added back for state tax, creating a state adjustment that must be tracked separately.

Improvements, repairs, and the boundary between them

The repair-or-improvement boundary decides whether a cost is deducted now or depreciated over years, and it is decided by what the work does, not by what it costs. A repair keeps the property in its ordinarily efficient operating condition: patching, repainting, fixing a leak, replacing a broken fixture with a like-kind one. An improvement betters the property, restores it, or adapts it to a new use: a new roof, a new heating system, an extension, a conversion. The regulations provide safe harbours, including a de minimis safe harbour for small items and a safe harbour for routine maintenance, and they provide an election to capitalise repairs in some circumstances. The safe harbours have dollar limits and election requirements, and they must be applied consistently, with a written policy where required.

Two examples make the boundary concrete. Replacing a $180 water heater that failed is a repair, deducted in the year paid, because it restores the property to working order without bettering it. Replacing all the plumbing in a building is an improvement, capitalised and depreciated, because it betters the system as a whole. Replacing a single broken window is a repair; replacing all the windows with double-glazed units is an improvement. The distinction is not always obvious, and the facts of the work, the invoices, and the condition of the property before and after are the evidence. When in doubt, the conservative course is to capitalise and depreciate, because an understated current deduction can be corrected, while an overstated one, if disallowed, carries interest and penalties. A tax professional should review the larger items before the return is filed, when the classification can still be changed cheaply.

Passive losses, and who can use them

Rental real estate is generally a passive activity, and passive losses — losses from rental activity, including depreciation — can generally only offset passive income, not wages or portfolio income, with the excess carried forward to future years or until the property is sold. Two exceptions matter. A taxpayer who actively participates in the rental activity, making management decisions, can deduct up to $25,000 of rental losses against other income, subject to a phase-out as modified AGI rises, and the exception is reduced or eliminated at higher incomes. A real estate professional, who meets the hours and participation tests, can treat rental activity as non-passive, and the losses can offset other income without the passive limit, subject to the other loss limitations, including the at-risk and excess-business-loss rules. The tests are strict, the hours must be documented, and the status must be elected and supported; claiming professional status without the hours is a common audit issue.

The practical consequence is that depreciation can create a paper loss that cannot be used this year, and the loss carries forward, accumulating, until there is passive income to absorb it or the property is sold, when the suspended losses are generally released. That does not make the depreciation worthless: it reduces basis, it shelters rental income in future years, and it is released on sale, but it does mean the cash benefit of depreciation may arrive years after the deduction is claimed. Planning should therefore model the whole holding period, not a single year, and should account for the taxpayer income level, the phase-outs, and the state treatment. Depreciation is a timing benefit, and timing benefits must be judged over the whole timeline, not in isolation.

On sale: recapture, basis, and the 25 percent rate

On sale, every dollar of depreciation claimed, or that should have been claimed, reduces the property basis, and the gain is the sale price minus the adjusted basis, minus selling costs. The portion of the gain attributable to depreciation on real property is generally taxed as unrecaptured section 1250 gain, at a maximum rate of 25 percent for individuals, while the remaining gain, the appreciation above original cost, is generally taxed at the long-term capital gains rates. The distinction matters: a property bought for $300,000, depreciated by $100,000, and sold for $400,000 has a gain of $200,000, of which $100,000 is unrecaptured section 1250 gain taxed at up to 25 percent, and $100,000 is appreciation taxed at the capital gains rates. The depreciation was deducted at ordinary rates when claimed, and recaptured at up to 25 percent on sale, which is often a rate benefit, but it is not tax-free, and it must be budgeted in the sale proceeds.

Unclaimed depreciation does not escape recapture. The basis is reduced by the depreciation allowed or allowable, whichever is greater, so a landlord who failed to claim depreciation still has the basis reduced as if it had been claimed, and pays recapture on depreciation never deducted. The remedy is to claim the missed depreciation by filing amended returns or a change in accounting method, under the procedures the IRS provides, rather than by ignoring it. The lesson is to claim depreciation every year, from the first year the property is placed in service, even in years when the loss cannot be used, because the suspended loss carries forward and the basis reduction happens whether the deduction is claimed or not. Depreciation is not optional in substance, even though it feels optional on the return: the tax system treats it as taken, and the taxpayer should take it in fact.

This guide is general information about how rental depreciation schedules work, not tax advice for a specific property. Classification of property, cost segregation, passive activity status, state decoupling, and the treatment on sale all depend on the facts, the documents, and the law in the year in question, and they should be confirmed with a qualified tax professional before a return is filed or a property is bought or sold. The schedule itself is arithmetic: basis divided by life, adjusted for the convention, with components on their own schedules. The judgement is in the inputs, and the inputs deserve the professional attention that the arithmetic does not need.

Frequently asked questions

How is rental property depreciated?

Residential rental property is depreciated straight-line over 27.5 years under MACRS, on the depreciable basis, which is the purchase price plus capitalised closing costs minus the land value. The annual deduction is the basis divided by 27.5, prorated in the first and last years by the mid-month convention. Land is never depreciated, and components such as appliances and land improvements use shorter recovery periods of 5, 7, and 15 years.

Can you depreciate land with a rental property?

No. Land does not wear out, so it is never depreciated. The purchase price must be allocated between land and building, commonly from the property tax assessment or an appraisal, and only the building portion enters the depreciation schedule. The allocation decides the annual deduction for 27.5 years, so it must be reasonable and supportable. Closing costs are allocated between land and building on the same basis.

What is cost segregation for rental property?

Cost segregation is an engineering study that identifies building components with shorter recovery periods, such as 5-year appliances and carpet and 15-year land improvements, and reclassifies their cost out of the 27.5-year building schedule. A study typically reclassifies 20 to 30 percent of basis, and the reclassified property can be written off faster, including in year one under 100 percent bonus depreciation where eligible. Studies typically cost $3,000 to $8,000 and pay best on larger portfolios.

What happens to depreciation when you sell a rental property?

Depreciation claimed, or that should have been claimed, reduces the property basis, increasing the gain on sale. The portion of gain attributable to depreciation is generally taxed as unrecaptured section 1250 gain at up to 25 percent, while appreciation above original cost is generally taxed at long-term capital gains rates. Suspended passive losses are generally released on a fully taxable sale. Unclaimed depreciation still reduces basis, so it should be claimed every year.

Is a new roof a repair or an improvement for a rental?

A new roof is an improvement, capitalised and depreciated over its recovery period, generally 27.5 years as a building component, because it betters and restores the building. A repair, such as patching a leak, is deducted in the year paid. The boundary is decided by what the work does, not by its price, and invoices describing the work are the evidence. Large items should be reviewed by a tax professional before the return is filed.

Why does a rental depreciation schedule run 28 years?

Because of the mid-month convention, which treats the property as placed in service at the midpoint of the month it enters service. The first year is therefore a partial year, and the remaining fraction spills into a 28th calendar year, so 27.5 years of recovery span 28 calendar years. The total over the whole schedule equals the depreciable basis exactly, with only the first and last years partial.