Rental Property Depreciation: How to Calculate It (2026 Guide)

The formula

Residential rental buildings depreciate over 27.5 years, straight-line:

Annual Depreciation = Building Basis ÷ 27.5

Two definitions matter:

• Building basis = purchase price + certain closing costs + improvements − the value of the land. Land never depreciates.
• 27.5 years applies to residential rentals. Commercial property uses 39 years.

Worked example

Say you buy a duplex for $425,000, and the county assessor attributes 20% of the value to land:

That's $12,364 a year you deduct against rental income without spending a dollar — on top of your actual expenses like taxes, insurance, and repairs.

If the property nets $8,000 a year in cash flow, depreciation can turn a taxable profit into a paper loss. That's why experienced landlords often show losses on their tax returns while collecting real cash.

The mid-month rule

Real estate uses a mid-month convention: whatever month you place the property in service, the IRS treats it as the middle of that month. Buy in July and your first year gets roughly 5.5 months of depreciation (about $5,667 in the example above), not a full year.

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How to split land from building

The IRS requires a "reasonable" allocation. The three common methods, from easiest to strongest:

1. Assessor's ratio — use the land-to-total ratio from your property tax assessment. Easiest to defend, most common.
2. Appraisal allocation — if your purchase appraisal broke out land value, use that.
3. Cost segregation study — a paid engineering study (more below) that also unlocks faster depreciation.

Land ratios vary hugely: 10–20% in much of the Midwest and South, 40%+ in expensive coastal metros. Don't guess low — an aggressive land allocation is a common audit adjustment.

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Bonus depreciation in 2026: what actually changed

You'll see headlines about "100% bonus depreciation is back." Here's what it actually means for landlords:

• The One Big Beautiful Bill Act (July 2025) permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025.
• Bonus depreciation applies to property with a class life of 20 years or less — appliances, carpeting, certain fixtures, land improvements like fences and driveways. It does not apply to the building itself (27.5 years).
• To use it at scale, investors order a cost segregation study, which reclassifies 20–30%+ of a building's basis into 5-, 7-, and 15-year components that qualify for the immediate write-off.

Example: on that $340,000 building basis, a cost seg study that reclassifies 25% ($85,000) into bonus-eligible components would let you deduct that $85,000 in year one — on top of regular depreciation on the rest. Studies typically cost $3,000–$10,000, so they make the most sense on larger properties or high-income years. (More on the 2026 rules.)

One caveat: big year-one losses only help if you can use them. For most people, rental losses are passive and limited to $25,000 against ordinary income (phasing out above $100,000 MAGI) — unless you qualify as a real estate professional. Unused losses carry forward.

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Depreciation recapture: the bill that comes due

Here's the part that surprises people at the closing table.

When you sell, the IRS recaptures the depreciation you took (or could have taken — you owe it either way, so never skip claiming depreciation). Unrecaptured Section 1250 gain is taxed at up to 25%, separate from the capital gains rate on the rest of your profit.

Using our duplex: hold it 10 years, take ~$123,600 of depreciation, and sell — you'd owe up to ~$30,900 in recapture tax on top of capital gains.

Ways investors handle recapture:

• 1031 exchange — defer both capital gains and recapture by rolling into a like-kind property. See our 1031 exchange guide.
• Hold until death — heirs get a stepped-up basis, and the recapture liability disappears (under current law).
• Just pay it — deferral for 10+ years at 0% interest is still a good deal; recapture doesn't erase the benefit, it discounts it.

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How depreciation changes your deal math

Depreciation doesn't show up in cap rate or cash-on-cash — those are pre-tax metrics. Where it matters:

• After-tax cash flow: a property with $8,000 cash flow sheltered by $12,364 of depreciation beats a stock dividend of $8,000 taxed at your marginal rate.
• Total ROI: tax savings are one of the four return streams (cash flow, appreciation, principal paydown, tax benefits). Our ROI calculator breaks these out.
• Comparing deals: two properties with the same cap rate but different building/land splits have different after-tax returns. High-land-value markets give you less to depreciate.

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FAQ

Do I have to take depreciation?

Effectively yes. The recapture rules apply to depreciation "allowed or allowable" — you'll be taxed at sale as if you claimed it, whether or not you did. Skipping it means paying the bill without ever getting the benefit. (If you've skipped it in past years, a CPA can fix it with a Form 3115 catch-up.)

Can I depreciate my primary residence?

No. Only property used to produce income. If you house-hack a duplex — live in one unit, rent the other — you depreciate the rental unit's share. Our house hacking guide covers the details.

What about improvements vs repairs?

Repairs (fixing a leak) are deducted in full the year you pay them. Improvements (new roof, addition) are added to basis and depreciated. The distinction is genuinely fuzzy at the margins — this is CPA territory.

Does depreciation reduce my basis even in loss years I couldn't use?

Yes — basis goes down by the depreciation allowable each year regardless of whether the passive loss rules let you use the deduction currently. The suspended losses carry forward and typically free up when you sell.

Is the 27.5-year schedule ever different?

Foreign residential rental property uses 30 years (ADS), and electing certain business exceptions can force ADS schedules. For a normal US residential rental, 27.5 is the number.

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Key takeaways

1. The formula: (price − land) ÷ 27.5 for residential rentals. Land never depreciates.
2. On a typical $425k duplex, that's roughly $12,000/year in deductions without spending anything.
3. 100% bonus depreciation is back (permanently, for property acquired after Jan 19, 2025) — but it applies to short-life components, not the building; cost segregation is how you reach it.
4. Recapture is real: up to 25% of every dollar you deducted comes due at sale, unless you 1031 or hold.
5. Always claim it — you're taxed as if you did anyway.

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Related reading

• Rental Property Tax Deductions: the full deduction checklist
• 1031 Exchange Guide: deferring gains and recapture
• Cash-on-Cash Return Guide: the pre-tax return metric depreciation doesn't touch