Rental [Property Depreciation](/blog/rental-property-tax-deductions) Guide: How to Maximize Your Tax Deductions in 2026

Depreciation is one of the most powerful tax benefits in [real estate investing](/blog/brrrr-strategy-guide). It lets you deduct a portion of your property's value every year—even while the property is actually appreciating.

This "paper loss" reduces your taxable income without affecting cash flow. For many investors, depreciation alone saves $5,000-15,000+ annually in taxes.

But depreciation has rules, exceptions, and strategies most investors don't understand. This guide shows you how depreciation works, how to calculate it, and how to maximize deductions legally.

What Is Rental Property Depreciation?

Depreciation is a tax deduction that accounts for the "wear and tear" on income-producing property over time. The IRS assumes buildings deteriorate and lose value, so they let you deduct a portion each year.

The concept: A rental property purchased for $300,000 today will be worth less in 27.5 years due to aging and deterioration. The IRS lets you deduct that theoretical loss annually.

Reality: Most properties appreciate, but you still get the deduction. That's what makes it powerful.

Basic Depreciation Rules

Who Can Depreciate?

You can depreciate property if:

• You own it
• You use it in business or income production (rental)
• It has a determinable useful life (buildings do, land doesn't)
• It lasts more than one year

Your primary residence: Not depreciable (no business use) Rental property: Fully depreciable

What Can You Depreciate?

Depreciable:

• Building and structure
• Permanent fixtures (built-in appliances)
• Major improvements (new roof, HVAC, etc.)

Not depreciable:

• Land (land doesn't wear out)
• Personal property you place in the rental (furniture in furnished rental)

The land allocation: Typically 15-25% of purchase price is land, 75-85% is building.

Depreciation Period

Residential rental property: 27.5 years (straight-line method) Commercial property: 39 years Land improvements: 15 years (parking lots, fences, landscaping)

You don't choose the period; the IRS defines it by property type.

How to Calculate Depreciation

Step 1: Determine Your Basis

Basis = Purchase price + acquisition costs + improvements - land value

Example:

• Purchase price: $425,000
• Closing costs: $8,500
• Immediate repairs/improvements: $12,000
• Total: $445,500
• Less land value (20%): -$89,100
• Depreciable basis: $356,400

Step 2: Apply the Depreciation Period

For residential rental:

Annual Depreciation = Depreciable Basis / 27.5

Example: $356,400 / 27.5 = $12,960 annual depreciation

Step 3: Apply Mid-Month Convention

In year one, you only deduct depreciation from the month you placed the property in service.

Mid-month convention: The IRS assumes you placed property in service mid-month, regardless of actual date.

Example:

• Purchased and rented in March
• Months in service year 1: March-December = 9.5 months
• Year 1 depreciation: $12,960 × 9.5/12 = $10,260
• Years 2-27: Full $12,960
• Year 28: Partial year to complete 27.5 years

The IRS provides depreciation tables (MACRS) that do this calculation automatically.

Real Example: Complete Depreciation Calculation

Property: Single-family rental in Charlotte, NC

Purchase details:

• Purchase price: $380,000
• Closing costs: $7,600
• Title and escrow: $1,800
• Inspection: $500
• Total acquisition cost: $389,900

Improvements before renting:

• Paint and flooring: $5,000
• New HVAC: $7,500
• Roof repair: $3,200
• Total improvements: $15,700

Total basis: $389,900 + $15,700 = $405,600

Land allocation:

• County assessor shows land at 22% of value
• Land value: $405,600 × 0.22 = $89,232
• Depreciable basis: $405,600 - $89,232 = $316,368

Annual depreciation: $316,368 / 27.5 = $11,504

Year 1 (purchased in June):

• Months: June-December = 6.5 months
• Year 1 depreciation: $11,504 × 6.5/12 = $6,231

Tax savings (assuming 24% bracket): Year 1: $6,231 × 0.24 = $1,495 Annual (years 2-27): $11,504 × 0.24 = $2,761

Over 27.5 years, total depreciation deductions: $316,368 Total tax savings at 24% bracket: $75,928

That's $75,000+ in tax savings from one property over time.

How to Determine Land Value

The IRS requires you to separate land from building value. Land isn't depreciable.

Methods:

1. County Assessor Records

Most reliable. Check your county property tax assessment, which typically shows land vs. improvement values.

Example:

• Total assessed value: $400,000
• Land: $80,000 (20%)
• Improvements: $320,000 (80%)

Use the 20/80 ratio for your purchase price.

2. Appraisal

If you got an appraisal, it should allocate land vs. building value.

3. Comparable Sales

Research what similar lots (without buildings) sell for in the area.

4. Insurance

Homeowner's insurance only covers the building, not land. The insured amount approximates building value.

Conservative approach: Use the method that gives the highest land value allocation. The IRS is more likely to challenge low land allocations than high ones.

Typical ranges:

• Urban properties: 15-30% land
• Suburban properties: 20-30% land
• Rural properties: 30-50% land
• Condos: 5-15% land

Capital Improvements vs. Repairs

Understanding this distinction is critical:

Repairs (Immediately Deductible)

Repairs maintain the property in its current condition.

Examples:

• Fixing a broken window
• Patching a roof leak
• Repainting (same color)
• Repairing plumbing leak
• Replacing broken appliance with similar model

Tax treatment: Fully deductible in the year incurred as operating expense.

Capital Improvements (Depreciate Over Time)

Improvements add value, prolong life, or adapt to new use.

Examples:

• New roof
• HVAC system replacement
• Room addition
• Kitchen remodel
• Replacing all windows
• New flooring throughout
• Fence installation

Tax treatment: Add to basis, depreciate over time (27.5 years for building, or shorter for certain items via cost segregation).

Gray areas:

Some expenses could go either way. The IRS safe harbor allows expenses up to $2,500 per item to be immediately expensed rather than capitalized. Some investors use this aggressively.

Example: Replace 5 windows at $600 each = $3,000 total

Option 1: Treat as capital improvement, add $3,000 to basis, depreciate over 27.5 years Option 2: Expense $2,500, capitalize $500 (if you consider each window separately under safe harbor)

Consult your CPA. Don't be overly aggressive.

Cost Segregation: Accelerating Depreciation

Cost segregation is a strategy to front-load depreciation deductions by identifying property components with shorter useful lives.

How It Works

Standard method: Entire building depreciated over 27.5 years.

Cost segregation: Break building into components:

• Land improvements (15 years): Parking, landscaping, fencing
• Personal property (5-7 years): Appliances, carpeting, fixtures
• Building (27.5 years): Structure, walls, foundation

Example property: $500,000 purchase

Standard depreciation:

• Depreciable basis: $400,000 (excluding land)
• Annual depreciation: $14,545

With cost segregation:

• 5-year property: $60,000 → $12,000/year
• 15-year property: $40,000 → $2,667/year
• 27.5-year property: $300,000 → $10,909/year
• Total year 1: $25,576 (with bonus depreciation on some items)

Nearly double the first-year deduction.

Bonus Depreciation

For property with useful life of 20 years or less, you can take 60% bonus depreciation in 2026 (phasing down from 100% in previous years).

2026 bonus depreciation schedule:

• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027: 0%

Example:

5-year property (appliances, carpeting): $60,000 Bonus depreciation (60%): $36,000 in year 1 Remaining $24,000 depreciated over 5 years

Total year 1 from this component: $36,000 + $4,800 = $40,800

When Cost Segregation Makes Sense

Good candidates:

• Property purchased for $500,000+
• Expecting high income (want large deductions)
• Real estate professionals (can deduct against W-2 income)
• Properties with significant personal property ([furnished rentals](/blog/dscr-loan-midterm-rental))

Cost:

• Engineer-based study: $5,000-15,000
• Software-based estimation: $500-2,000

ROI: Often 5-10x the cost in tax savings.

Example:

• Study cost: $7,000
• Additional year 1 depreciation: $35,000
• Tax bracket: 35% (federal + state)
• Tax savings: $12,250
• Net benefit year 1: $5,250

Plus ongoing benefits in future years.

DIY Cost Segregation

For smaller properties, you can do a simplified segregation:

Common 5-year property:

• Appliances: $3,000
• Carpeting: $2,500
• Ceiling fans: $300
• Window treatments: $800
• Total: $6,600

Common 15-year property:

• Fencing: $4,000
• Driveway: $6,000
• Landscaping: $2,500
• Deck/patio: $5,000
• Total: $17,500

Remaining 27.5-year property:

• Total basis: $400,000
• Less 5-year: -$6,600
• Less 15-year: -$17,500
• Remaining: $375,900

Not as aggressive as professional study but captures obvious items.

Depreciation Recapture: What You'll Pay Later

Depreciation isn't free. When you sell, you'll pay depreciation recapture tax.

How Recapture Works

You pay tax on depreciation deductions you took (or should have taken).

Tax rate: 25% federal (plus state) on recaptured depreciation.

Example:

Original purchase:

• Purchase price: $400,000
• Land: $80,000
• Depreciable basis: $320,000

10 years of ownership:

• Annual depreciation: $11,636
• Total depreciation taken: $116,360

Sale:

• Sale price: $550,000
• Adjusted basis: $400,000 - $116,360 = $283,640
• Total gain: $550,000 - $283,640 = $266,360

Tax breakdown:

• Depreciation recapture: $116,360 at 25% = $29,090
• Remaining gain: $150,000 at 20% (long-term cap gains) = $30,000
• Total tax: $59,090

Plus:

• State tax (varies by state)
• Net Investment Income Tax (3.8% on some income)

Avoiding or Deferring Recapture

1031 Exchange: Defer both capital gains and depreciation recapture by exchanging into another property.

Hold until death: Your heirs inherit with [stepped-up basis](/blog/selling-inherited-property). Depreciation recapture disappears.

Convert to primary residence: Live in property 2 of last 5 years before selling, potentially exclude $250,000/$500,000 of gain under Section 121. But you still owe recapture tax on depreciation.

There's no way to permanently avoid recapture except death (stepped-up basis) or donating property to charity.

Special Situations

Renting Part of Your Home

If you rent out a room or ADU, you can depreciate that portion.

Example:

• Home value: $500,000
• 20% used as rental (one bedroom + shared space)
• Depreciable rental portion: $500,000 × 0.20 × 0.80 (excluding land) = $80,000
• Annual depreciation: $80,000 / 27.5 = $2,909

Short-Term Rentals (Airbnb/VRBO)

Still depreciable as rental property. Depreciation period depends on average rental duration:

• Average stay <30 days: Might qualify as transient (hotel-like), different rules
• Most still use 27.5-year residential schedule

Consult CPA for your specific situation.

Vacation Homes

Must rent at fair market rate and limit personal use to 14 days or 10% of rental days to depreciate.

Safe harbor: If you rent 100+ days and personal use <10 days, you're clearly rental property.

Mixed use (significant personal use): Depreciation allocated based on rental days / total days.

Property Converted to Rental

Example: Lived in house 5 years, convert to rental.

Basis for depreciation: Lower of:

1. Original cost + improvements, or
2. Fair market value at conversion

Example:

• Purchased 2016: $300,000
• Improvements: $40,000
• Basis: $340,000
• FMV at conversion (2026): $420,000

Depreciable basis: $340,000 (lower of the two) Less land (20%): -$68,000 Depreciable: $272,000

Why the lower of rule? Prevents you from depreciating appreciation that occurred during personal use.

Depreciation and [Passive Activity Loss Rules](/blog/rental-property-tax-guide-2026)

Depreciation creates "passive losses" that offset passive income (rental income).

For Most Investors

• Rental income: $24,000
• [Operating expenses](/blog/net-operating-income-guide): $10,000
• Depreciation: $12,000
• Net taxable income: $2,000 (down from $14,000 without depreciation)

Depreciation reduced taxable income by $12,000.

If expenses + depreciation exceed income:

• Rental income: $24,000
• Operating expenses: $15,000
• Depreciation: $12,000
• Net: -$3,000 loss

Can you deduct the loss?

Depends on your income and involvement.

$25,000 Special Allowance

If your Modified Adjusted Gross Income (MAGI) is <$100,000, you can deduct up to $25,000 in rental real estate losses against W-2 income.

Requirements:

• Active participation (make management decisions, approve tenants, etc.)
• MAGI <$100,000 (full allowance) to $150,000 (phased out)

Example:

• W-2 income: $85,000
• Rental loss (including depreciation): -$8,000
• Taxable income: $77,000

You saved tax on $8,000 at your marginal rate (probably 22% = $1,760 savings).

Above $150,000 MAGI: Losses are suspended and carried forward until you have passive income or sell the property.

[Real Estate Professional Status](/blog/real-estate-professional-status)

If you qualify as a real estate professional:

• 750+ hours working in real estate
• More than 50% of your working time in real estate

Then rental losses fully deduct against all income (W-2, business, etc.).

This is huge for high-income investors who work in real estate full-time.

Maximizing Depreciation Deductions

1. Increase Your Basis

Higher basis = more depreciation.

Include in basis:

• Purchase price
• Closing costs
• [Title insurance](/blog/title-search-explained)
• Legal fees
• Recording fees
• Transfer taxes
• Improvements made before placing in service

Don't include:

• Mortgage interest
• Property taxes (deduct separately)
• Loan origination fees (amortize separately)

2. Use Cost Segregation

For properties over $500,000, get a cost segregation study. Front-load deductions.

3. Separate Land Improvements

Fence, parking, landscaping depreciate over 15 years (not 27.5). Capture that faster depreciation.

4. Time Your Purchase

Mid-month convention means you get half-month depreciation regardless of closing date.

Buying Dec 31? You get 0.5 months depreciation (2% of annual). Buying Jan 1? You get 11.5 months depreciation (96% of annual).

If possible, close early in the year to maximize first-year deduction.

5. Make Major Improvements Early

Improvements start depreciating when placed in service. Do renovations in year 1 to maximize depreciation years.

6. Document Everything

Keep receipts, invoices, and documentation for all improvements. You'll need them when you sell for basis calculation.

Depreciation Record Keeping

What to Track

For each property:

1. Purchase price and date
2. All closing costs
3. Land vs. building allocation
4. All capital improvements (date, amount, description)
5. Annual depreciation calculations
6. Cost segregation study results (if applicable)

Spreadsheet approach:

Track accumulated depreciation to calculate recapture when you sell.

Software

Tax software:

• TurboTax Premier/Home & Business
• H&R Block Premium
• TaxAct Premier

All handle rental property depreciation.

Accounting software:

• QuickBooks
• Stessa (real estate specific, free)
• Landlord Studio
• Baselane

Track income, expenses, and auto-calculate depreciation.

Common Depreciation Mistakes

1. Not Taking Depreciation

"I'll skip depreciation to avoid recapture when I sell."

Wrong. IRS requires you to recapture depreciation "allowed or allowable." Even if you don't take it, you owe recapture tax.

Always take depreciation. You'll pay recapture either way—might as well get the benefit.

2. Depreciating Land

Land isn't depreciable. Including land value in depreciation calculation overstates your deduction and triggers IRS adjustment.

3. Wrong Useful Life

Residential rental is 27.5 years, not 39. Using wrong schedule reduces your deductions.

4. Forgetting Mid-Month Convention

Year 1 depreciation is partial based on month placed in service.

5. Not Documenting Improvements

You did a $15,000 kitchen remodel but have no receipts. Can't prove basis increase. Missed deduction opportunity and will overpay tax on sale.

6. Mixing Personal and Rental

Can't depreciate your primary residence. If you convert to rental, start depreciation at conversion, not original purchase.

The Bottom Line

Depreciation is one of real estate's biggest tax advantages. For a typical $400,000 rental property:

• Annual depreciation: ~$12,000
• Tax savings at 24% bracket: ~$2,900/year
• Total tax savings over 27.5 years: ~$75,000+

Key points:

• Residential rental properties depreciate over 27.5 years
• Only buildings depreciate—not land
• Cost segregation accelerates deductions (worth it for $500k+ properties)
• You'll pay 25% recapture tax when you sell (plus state tax)
• Use 1031 exchange or hold till death to defer/avoid recapture

Take action:

1. Calculate your property's depreciable basis correctly
2. Separate land from building (use county assessor)
3. Consider cost segregation for larger properties
4. Track all improvements to increase basis
5. Work with CPA who specializes in real estate

Depreciation legally reduces your tax bill by thousands per property per year. Don't leave this money on the table.

Related Articles

• 1031 Exchange for Beginners: Complete Guide to Deferring Capital Gains Taxes
• 1031 Exchange: Defer Taxes, Build Wealth Faster
• Cost Segregation Study Guide: How Real Estate Investors Accelerate Depreciation to Save Thousands