[Rental [Property Depreciation](/blog/rental-property-tax-deductions)](/blog/depreciation-real-estate-guide) Schedule: A Complete Investor's Breakdown

Depreciation is one of the most powerful tax advantages in real estate — and one of the most underutilized. Many landlords know they can "depreciate" their rental property over 27.5 years, but few understand how to maximize this benefit through proper depreciation scheduling, component analysis, and cost segregation studies.

This guide walks through exactly how depreciation schedules work, what assets depreciate at different rates, and how sophisticated investors accelerate deductions to dramatically reduce their current tax bills.

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The Foundation: What Can Be Depreciated?

The IRS allows you to deduct the cost of your rental property over its "useful life" — even if the property is actually appreciating in value. This non-cash deduction reduces your taxable income without reducing your cash flow, which is what makes it so valuable.

What qualifies for depreciation:

• The building itself (structure, foundation, framing, roofing, mechanical systems)
• Improvements and additions
• Certain personal property placed in service in the rental
• Land improvements (parking lots, fences, landscaping)

What does NOT depreciate:

• Land (the IRS considers land to have an indefinite useful life)
• Personal property you own but don't use in the rental
• Expenses that are immediately deductible (repairs vs. improvements)

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The Standard Residential Depreciation Schedule

For residential rental property (single-family, duplexes, fourplexes, multifamily up to any number of units where the majority of gross rental income is from dwelling units), the standard depreciation period is 27.5 years using the straight-line method.

How to Calculate Annual Depreciation

Step 1: Determine your depreciable basis

• Start with your purchase price
• Add closing costs (not fully deductible)
• Add any capital improvements
• Subtract the land value

Step 2: Divide by 27.5

Example:

• Purchase price: $350,000
• Closing costs: $8,000
• Initial improvements: $25,000
• Land value (assessed): $60,000
• Depreciable basis: $350,000 + $8,000 + $25,000 − $60,000 = $323,000
• Annual depreciation: $323,000 ÷ 27.5 = $11,745/year

If your property generates $18,000/year in net rental income before depreciation, your taxable income drops to just $6,255 — an enormous tax benefit.

The Mid-Month Convention

The IRS uses a "mid-month convention" for residential rental property: regardless of what day of the month you place the property in service, it's treated as if you acquired it on the 15th of that month. This affects your first-year depreciation calculation.

First-year depreciation example (property placed in service July 10):

• Full-year depreciation: $11,745
• Months of service (mid-July to December 31): 5.5 months
• First-year depreciation: $11,745 × (5.5/12) = $5,383

You also continue depreciating in the year you sell (until the mid-month of the disposal month), and then depreciation recapture applies.

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Component Depreciation: Different Assets, Different Lives

The 27.5-year schedule applies to the building structure — but a properly structured depreciation schedule separates the building into individual components, each with its own useful life.

This is where things get interesting.

IRS Property Classification

The IRS classifies property into recovery periods under MACRS (Modified Accelerated Cost Recovery System):

Why Component Classification Matters

If you purchase a rental property and lump everything into 27.5-year depreciation, you're leaving money on the table. Many components of a building qualify for much shorter depreciation periods.

Example of a $400,000 rental property breakdown:

• Building structure: $280,000 (27.5 years)
• Electrical wiring: $25,000 (27.5 years as structural component)
• Flooring/carpet: $15,000 (5 years)
• Appliances: $8,000 (5 years)
• Landscaping: $12,000 (15 years)
• Driveway/parking: $10,000 (15 years)
• Cabinets (personal property): $18,000 (5 or 7 years — depends on classification)
• Land: $32,000 (no depreciation)

By properly classifying components, you create substantially larger deductions in the early years, when the time value of money makes them most beneficial.

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Cost Segregation Studies: The Professional Approach

A cost segregation study is an engineering analysis that reclassifies portions of your building from 27.5-year or 39-year property into 5-, 7-, or 15-year property. The result: dramatically accelerated depreciation in the first 5–10 years of ownership.

What a Cost Segregation Study Finds

Typical components reclassified in a residential rental through cost segregation:

• 5-year property: Decorative millwork, specialty plumbing, carpets, appliances, certain electrical outlets and fixtures
• 7-year property: Office-use components, specialized fixtures
• 15-year property: Parking surfaces, sidewalks, exterior lighting, landscaping, fences, site utilities

A well-executed cost segregation study on a $500,000 rental property might reclassify $60,000–$100,000 of components into shorter-lived categories, creating $30,000–$50,000 of additional first-year depreciation (when combined with [bonus depreciation](/blog/depreciation-rental-property-guide)).

Bonus Depreciation and Cost Segregation

Under the Tax Cuts and Jobs Act (2017), 5-, 7-, and 15-year property placed in service can be fully expensed in the first year using bonus depreciation. The bonus depreciation phase-down schedule:

• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20% (current year)
• 2027 and beyond: 0% (unless Congress acts)

Even at 20%, the acceleration from a cost segregation study on a $400,000 property can generate $10,000–$20,000 of additional first-year deductions.

For commercial properties (39-year), cost segregation is even more impactful because the gap between the standard depreciation period and the reclassified life is larger.

Cost Segregation ROI

Cost segregation studies typically cost $3,000–$15,000 depending on property size and complexity. The tax savings almost always dwarf this cost on properties valued over $300,000.

Rule of thumb: If you own a rental property worth $250,000 or more, a cost segregation study is worth investigating. For a portfolio of properties, the cumulative savings can be transformational.

The American Society of Cost Segregation Professionals (ASCSP) maintains a directory of qualified specialists.

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Partial Asset Disposition: Deducting Replaced Components

One overlooked depreciation opportunity: partial asset disposition (PAD). When you replace a component of your rental property — a roof, HVAC system, water heater — you can deduct the remaining adjusted basis of the old component rather than continuing to depreciate it.

Example:

• You replace a roof that was original to a property you purchased 10 years ago
• The original roof was worth $20,000 (27.5-year property)
• After 10 years, you've depreciated $7,273 ($20,000 ÷ 27.5 × 10)
• Remaining basis: $12,727

Without PAD: You continue depreciating the old roof for 17.5 more years and also begin depreciating the new roof.

With PAD: You deduct the remaining $12,727 in the year of replacement (as a loss on disposal) AND begin depreciating the new roof.

This is especially valuable when you replace major systems (HVAC, roofing, plumbing, electrical) after a significant portion of the asset's life has already been depreciated.

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Capital Improvements vs. Repairs: A Critical Distinction

Your depreciation schedule only grows when you make capital improvements — not repairs and maintenance. The IRS distinguishes between them under the Tangible Property Regulations (TPR):

Capital improvements (must be added to basis and depreciated):

• Additions that add new square footage
• Betterments that materially improve or restore the property
• Adaptations that change the property's use

Deductible repairs (immediately deductible):

• Fixing a broken window
• Patching drywall
• Repainting interior or exterior
• Fixing a leaking faucet

Gray area examples:

• Replacing an entire roof: Capital improvement
• Replacing a few shingles: Repair
• Renovating a kitchen: Capital improvement if it "betters" the property
• Replacing a countertop: May be a repair depending on circumstances

This distinction matters enormously for your tax strategy. Work with a CPA who understands the Tangible Property Regulations to ensure you're categorizing correctly.

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Tracking Your Depreciation Schedule

Every asset on your depreciation schedule needs:

1. Description of the asset
2. In-service date (when placed in rental use)
3. Original cost (your depreciable basis)
4. Recovery period (5, 7, 15, 27.5, or 39 years)
5. Depreciation method (straight-line for 27.5/39 year; MACRS for shorter-lived property)
6. Accumulated depreciation to date
7. Remaining basis (current year book value)

Most tax software (and your CPA's software) handles this automatically when you input property details correctly. The key is providing accurate information about component values at purchase.

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Depreciation Recapture: What You Owe When You Sell

All deferred taxes come due eventually. When you sell a rental property, the IRS "recaptures" depreciation you've taken:

• Section 1250 recapture (unrecaptured depreciation on real property): Taxed at a maximum rate of 25%
• The remaining gain (purchase price appreciation) is taxed at long-term capital gains rates (0%, 15%, or 20%)

Example:

• Purchased for $300,000, sold for $500,000
• Accumulated depreciation: $60,000
• Total gain: $200,000 + $60,000 recapture = $260,000

Tax liability:

• $60,000 × 25% = $15,000 (depreciation recapture)
• $200,000 × 15% = $30,000 (long-term capital gains)
• Total: $45,000

Avoid recapture by:

• Completing a [[1031 exchange](/blog/1031-exchange-guide)](/blog/1031-exchange-guide) to defer all taxes
• Holding until death ([stepped-up basis](/blog/selling-inherited-property) eliminates deferred gains)
• Completing an installment sale over multiple years

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How [DSCR Loans](/blog/best-dscr-lenders-2026) Support Depreciation Strategy

When you finance investment properties with DSCR loans, you're typically acquiring and holding more properties — which means more depreciation deductions. Investors who build portfolios of 10–20 DSCR-financed properties often generate six figures in annual depreciation deductions that offset substantial W-2 or business income (subject to passive activity rules and [real estate professional status](/blog/real-estate-professional-status)).

Learn how DSCR loans can help you scale your portfolio →

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Related Articles

• Depreciation Recapture Explained
• Cost Segregation Study Guide
• Bonus Depreciation for Real Estate in 2026
• [Rental [Property Tax Guide](/blog/property-tax-guide) 2026](/blog/rental-property-tax-guide-2026)
• Real Estate Professional Status Explained
• 1031 Exchange Guide for Beginners