🏠 If you own a rental property, here’s some good news: you can deduct a portion of its cost every year on your taxes through something called depreciation.
Even better? You don’t need to be an accountant to figure it out—we’ll walk you through it step by step!
Table of Contents
🙋 What Is Depreciation?
Depreciation is the process of spreading out the cost of your rental property over time. The IRS assumes that buildings wear down (even if they actually go up in value), so they let you deduct part of the cost each year.
This helps reduce your taxable income, meaning you could owe less in taxes.
⭐ Important Basics Before You Start
Here’s what you need to know:
- 🏠 Only the building depreciates — not the land.
- 📆 Residential rental properties are depreciated over 27.5 years.
- 📅 You start depreciating the property the year it’s placed in service (rented out).
- ✅ You must own the property and use it to produce rental income.
🧮 How to Calculate Depreciation on a Rental Property
📌 Step 1: Determine the Cost Basis of the Property
This is usually the purchase price, plus:
- Closing costs (like legal fees or title fees)
- Major improvements (like a new roof or HVAC)
📌 Step 2: Separate Land and Building Value
You can’t depreciate land—only the building.
Use the tax assessor’s records or appraisal to split the value.
⚙️ Example:
- Purchase price: $300,000
- Assessed value shows: 80% building, 20% land
→ Building value = $300,000 × 80% = $240,000
📌 Step 3: Use the 27.5-Year Rule
Now divide the building value by 27.5 years.
Annual Depreciation = Building Value ÷ 27.5✅ $240,000 ÷ 27.5 = $8,727.27 per year
That’s how much you can deduct each year for depreciation!
🧮 Rental Depreciation Calculator
Use the tool below to calculate the annual depreciation. Enter the building cost and the tool will calculate the value that can be deducted every year.
🧾 What About Partial Years?
If you bought the property mid-year, you’ll only depreciate it for part of that year. The IRS uses a “mid-month convention” which assumes you started renting it halfway through the month you placed it in service.
💡 Don’t worry—you can use IRS Publication 527 or tax software to get the exact monthly amount.
💡 Bonus Tip: Keep Records!
Hold onto:
- Purchase documents
- Appraisals or assessor records
- Improvements made to the property
This helps support your deduction in case the IRS comes knocking!
✅ Quick Recap
| Step | What to Do |
|---|---|
| 1. Find cost basis | Purchase price + closing costs |
| 2. Allocate land/building | Use appraisal or tax records |
| 3. Depreciate the building | Divide by 27.5 years |
| 4. Deduct each year | Claim it on your tax return |
🏁 Why It Matters
Depreciation:
- Lowers your taxable rental income
- Helps you keep more profit
- Is a major tax benefit of owning rental real estate