For federal income tax, residential rental buildings depreciate at roughly 3.636% per year over a 27.5-year recovery period, and commercial (nonresidential) buildings depreciate at roughly 2.564% per year over 39 years. Both use the straight-line method required for real property, which spreads the building’s cost evenly across its assigned life. The deduction applies only to the structure, never the land, and the property has to be used in a business or held to produce income. Those are the building depreciation rates for income tax purposes, and everything else is a question of how you apply them to your specific property.
Who Can Depreciate a Building
Four conditions have to be met before any depreciation is allowed. You have to own the property, it has to be used in your business or held for income (a rental house, an office, a warehouse), it has to have a useful life you can estimate, and that life has to exceed one year.1Internal Revenue Service. Topic No. 704, Depreciation A home you live in doesn’t qualify no matter what it cost. Depreciation starts the day you place the property in service for the business or rental use.
Converting a personal residence to a rental has its own rule. Depreciation begins on the conversion date, and your depreciable basis is the lower of the property’s original cost or its fair market value on that date. That prevents you from writing off a decline in value that happened while it was still your home. Keep the conversion date and a supportable value figure on file, because this is the kind of detail auditors look at.
Splitting Land From Building
Land doesn’t wear out, so it isn’t depreciable.2Internal Revenue Service. Publication 946 – How To Depreciate Property Before you calculate anything, split the purchase price between the land and the building. Only the building side is your depreciable basis.
The most common source for the split is the local property tax assessment, which usually shows improvements separately from land. If the assessment looks stale or off, an independent appraisal gives you a stronger allocation. Overstating the building portion is one of the fastest ways to inflate a deduction and draw an audit.
Your basis isn’t limited to what you paid for the structure. Certain settlement costs at closing are added in: legal fees, recording fees, title insurance, survey fees, and transfer taxes all count.3Internal Revenue Service. Publication 551 – Basis of Assets Loan-related costs like mortgage origination fees do not. Capital improvements you make later, meaning work that adds value or extends the building’s life, also increase basis, but each improvement is depreciated on its own schedule starting when it’s placed in service.
Residential Rental or Commercial: The 80% Test
Which rate applies depends on how the building is used, and the classification rule is specific.
- Residential rental property, 27.5 years. A building qualifies if 80% or more of its gross rental income for the year comes from dwelling units. Dwelling units are houses or apartments used for living, not hotel or motel rooms where more than half the units serve transient guests. Apartment buildings, duplexes, and single-family rentals sit here.4Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
- Nonresidential real property, 39 years. Offices, retail, warehouses, and manufacturing facilities fall here. Any building that fails the 80% residential income test lands in this longer category too, even if part of it is residential.4Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
For a mixed-use property, run the 80% test on the whole structure’s gross rental income. Fall short and the entire building is on the 39-year schedule. Classification mistakes are common on mixed-use property, and they lead to underpaid tax plus interest.
Applying the Rate
Real property has to use straight-line depreciation, which divides the depreciable basis equally across every year of the recovery period.4Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System A residential rental with a $275,000 depreciable basis produces a $10,000 annual deduction ($275,000 ÷ 27.5). A commercial building with the same basis produces about $7,051 per year ($275,000 ÷ 39).
The first year and the last year work differently. Real property uses the mid-month convention, which treats the building as placed in service at the midpoint of the month you actually started using it.2Internal Revenue Service. Publication 946 – How To Depreciate Property Place a rental in service on any day in March and you get 9.5 months of depreciation for that first year. The same logic runs in reverse when you sell or take the building out of service.
Faster Write-Offs on Commercial Interiors
Interior work on a commercial building can move onto a shorter schedule. Qualified improvement property is an improvement made to the interior of a nonresidential building after the building was already placed in service. These improvements have a 15-year recovery period instead of 39 years, which roughly doubles the annual deduction per dollar spent.
Not every interior change qualifies. Expanding the footprint, installing elevators or escalators, and altering the internal structural framework are all excluded. For 2026, eligible interior improvements can also qualify for 100% bonus depreciation under the One Big Beautiful Bill Act, which lets you deduct the full cost in the year the improvement is placed in service.
Cost Segregation
The default rate treats the entire building as one asset. A cost segregation study breaks it into pieces and moves components with shorter lives onto faster schedules of five, seven, or 15 years while the shell continues on 27.5 or 39. Specialized electrical systems, decorative finishes, site paving, and landscaping are common candidates.
The IRS has published requirements for what an acceptable study looks like. It has to be prepared by someone with engineering or construction expertise, include a detailed engineering analysis of costs, reconcile allocated costs back to total actual costs, and identify each asset’s legal classification.5Internal Revenue Service. Cost Segregation Audit Technique Guide Professional studies typically run from $2,000 to $8,000 depending on complexity. For buildings worth $500,000 or more, the accelerated deductions almost always outweigh the study cost; below that, the math gets tighter.
How to File the Deduction
Depreciation is reported on IRS Form 4562, with the property description, the placed-in-service date, the depreciable basis, the recovery period, and the method.6Internal Revenue Service. Instructions for Form 4562 – Depreciation and Amortization From there the deduction flows to the schedule that matches the activity.
- Rental property owners report on Schedule E (Form 1040), which handles supplemental income and loss from rental real estate.7Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss
- Sole proprietors report on Schedule C (Form 1040) when the building is used in a trade or business.8Internal Revenue Service. Instructions for Schedule C (Form 1040)
Numbers on Form 4562 should match the purchase records and prior-year filings. Year-to-year inconsistencies are among the easiest things for automated screening to flag.
What Happens When You Sell
Every dollar of depreciation you claim reduces your adjusted basis, and a lower basis means a bigger taxable gain at sale. The portion of that gain tied to prior depreciation is called unrecaptured Section 1250 gain, and it’s taxed at a maximum federal rate of 25%, which is higher than the long-term capital gains rates most sellers expect. Gain above the total depreciation claimed is taxed at the regular long-term capital gains rates of 0%, 15%, or 20% depending on income.
There’s an uncomfortable rule underneath this. Even if you never claimed depreciation, recapture is calculated on the depreciation you were allowed to take. Skipping the deduction during ownership doesn’t save you at sale; you can end up paying tax on depreciation you never actually deducted.
Fixing Missed or Wrong Depreciation
If you forgot to claim depreciation in prior years or used the wrong recovery period, you generally don’t amend each old return. You file IRS Form 3115 (Application for Change in Accounting Method) with your current-year return, which triggers a Section 481(a) adjustment capturing the cumulative difference between what you did claim and what you should have claimed.
When the correction means you under-deducted in prior years, the full catch-up is typically taken as a single deduction in the year you file Form 3115. Most depreciation corrections use the automatic procedure, so advance IRS approval isn’t required. Because recapture is calculated on the depreciation you were allowed to take, correcting the record before a sale is one of the more valuable moves available.
Records to Keep
Keep property records for as long as you own the building, plus the period of limitations for the year you sell.9Internal Revenue Service. How Long Should I Keep Records That means holding onto purchase contracts, closing statements, improvement receipts, and depreciation schedules through the entire ownership period and at least three years after the return that reports the sale. The general statute is three years but extends to six if you underreport income by more than 25%.10Internal Revenue Service. Topic No. 305, Recordkeeping For a building held two decades, that’s two decades of documentation, so digital copies stored in more than one place are worth the small effort.