Depreciation lets you deduct the cost of a rental building over its useful life even if the property is rising in value. For residential rental property the IRS recovery period is 27.5 years, straight-line; for nonresidential real property it is 39 years. It is a genuine deduction that can shelter cash flow, but it also builds up gain that is recaptured when you sell.
Only the building is depreciable — land is never depreciated. The first year uses the mid-month convention, so a property placed in service in June is treated as in service at mid-June and receives 6.5 months of depreciation that year, not 12.
Formula
Annual depreciation = (Building basis − Land) ÷ 27.5 years
Building basis is what you paid for the property plus capital improvements, minus the land value. Divide the depreciable basis by 27.5 (residential) or 39 (nonresidential) for the full-year deduction. The first year is prorated by the mid-month convention: (12 − month + 0.5) ÷ 12. Your marginal tax rate turns the deduction into tax savings, and the depreciation you claim is later recaptured at up to 25% when you sell.
How to calculate it
- Add your purchase price and capital improvements to get total basis.
- Subtract the land value; only the building basis can be depreciated.
- Divide the depreciable basis by 27.5 years (residential) or 39 years (commercial).
- Prorate the first year with the mid-month convention based on the month placed in service.
- Multiply the deduction by your marginal tax rate for the annual tax savings (a “tax shield”).
- Track the depreciation claimed — it is recaptured at up to 25% when you sell.
Worked example
Assume a $350,000 rental purchase plus $25,000 of improvements, with $90,000 of that value attributed to land. The building basis is $285,000. Placed in service in June, held 10 years, with a 24% marginal tax rate. Running those numbers through the RentScope depreciation engine gives:
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FAQ
How is rental property depreciation calculated?
Take the building basis (purchase price plus capital improvements minus land value) and divide it by the recovery period — 27.5 years for residential rental property or 39 years for nonresidential real property. That gives the full annual straight-line deduction.
Can I depreciate land?
No. Land is not a depreciable asset. You must split the purchase price between the building and the land (commonly using the county assessor’s allocation or an appraisal) and depreciate only the building portion.
What is the mid-month convention?
The IRS treats real property as placed in service at the midpoint of the month it was placed in service. A property placed in service in June gets 6.5 months of depreciation in year one (mid-June through December), which is why the first-year deduction is lower than later years.
What is depreciation recapture?
When you sell, the depreciation you claimed is taxed as unrecaptured Section 1250 gain at a rate of up to 25% — separate from and in addition to capital-gains tax on appreciation. That is why depreciation is often described as a tax deferral rather than a permanent tax break. A Section 1031 exchange can defer recapture.
Do improvements increase depreciation?
Yes. Capital improvements are added to basis and depreciated over the remaining recovery period. Replacing a roof or HVAC extends the building’s basis; ordinary repairs are expensed instead. Some components may qualify for faster recovery with a cost-segregation study, which this calculator does not model.
Does this calculator apply to commercial property?
You can switch the property type to nonresidential to use the 39-year recovery period. Note that nonresidential real property follows the same mid-month convention but a longer recovery period, so the annual deduction is smaller.
Is this tax advice?
No. It is an educational estimate. It does not model cost segregation, bonus depreciation, Section 179, state differences, or passive-activity limits. Confirm your situation with a qualified tax professional.
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