Comprehensive Guide
Learn more in our Investing Guide.
How it works
Rental property depreciation is the tax code's quiet gift to landlords: the IRS presumes buildings wear out, so the structure's basis is deducted over 27.5 years for residential property — a paper loss that shelters real rental income without a dollar leaving your pocket. The baseline schedule is mechanical: depreciable basis (structure plus allocable closing costs, never land) divided across the recovery period with a half-year convention in year one. Cost segregation sharpens the pencil by carving components out of the building onto shorter lives — appliances, carpet and cabinetry onto five-year property, fencing and paving onto fifteen-year — pulling deductions forward into the years they matter most. This calculator computes both schedules side by side across fifteen years: the steady 27.5-year deduction, the front-loaded cost-seg version with realistic 5–15% component shares, and the extra dollars each early year captures, priced into actual tax saved at your marginal bracket. Two truths frame the exercise. Accelerated depreciation is timing, not escape — recapture waits at sale, which is why investors pair this tool with the 1031 exchange. And component percentages survive scrutiny only when a real study supports them; the defaults here model what credible studies find, not what wishful thinking wants.Formula
Standard = basis ÷ 27.5 (half-year yr 1) | Cost-seg adds personalProperty ÷ 5yr-class and landImprovements ÷ 15yr-class | Shield = deduction × bracket
Tips
- Allocate purchase price between land and building from the assessment ratio, never 100% building.
- Cost-seg studies pay for themselves above roughly $500,000 basis; below that, DIY splits invite audits.
- Depreciation continues while the unit is vacant — vacancy changes income, not the schedule.
- Track improvements separately: a new roof starts its own 27.5-year clock at placement.
- Remember passive-loss limits — depreciation sheltering W-2 income needs real-estate-professional status.
Frequently asked questions
How is rental property depreciation calculated?
Depreciable basis divided by 27.5 years, residential. A $264,000 building plus $6,000 of allocated closing costs deducts about $9,818 yearly — $4,909 in year one under the half-year convention. Land is never depreciable, which is why the land-building allocation is the calculation's most consequential input.
What is cost segregation on a rental property?
An engineering-based study splitting building components onto shorter MACRS lives: interior elements onto five-year property, site work onto fifteen-year. Splitting 10% of basis off the 27.5-year schedule here lifts five-year deductions by thousands and front-loads tax shields into your highest-earning years — acceleration, not additional total deductions.
Do I have to depreciate my rental property?
The IRS treats depreciation as allowed or allowable — skipped depreciation is deducted from basis at sale anyway, so opting out simply forfeits years of tax shields while still facing full recapture later. Claim it every year; fixing missed schedules is possible but involves form 3115 paperwork no one enjoys.
What happens to depreciation when I sell?
Recapture: total depreciation claimed is taxed at up to 25% federally, layered under capital-gains treatment on the remaining gain. Selling outright after years of $9,800 deductions surrenders a meaningful slice at closing. A 1031 exchange rolls the entire reckoning into the replacement property, which is why the two strategies travel together.
Does depreciation apply to the land under my rental?
Never — land does not wear out, so only the structure and improvements depreciate. Purchase-price allocations commonly assign 15–25% to land based on assessed ratios. Overstating the building share flatters deductions temporarily and unwinds painfully at audit or sale, so anchor the allocation to county assessments.