Can You Depreciate Rental Property? Rules, Rates, and Recapture

Yes, you can depreciate rental property, and in most cases you must. Federal tax law lets owners of income-producing real estate deduct the cost of the building over a fixed number of years instead of all at once: 27.5 years for residential rentals and 39 years for nonresidential.¹ Land never depreciates. And the deduction is not optional — the IRS treats depreciation as “allowed or allowable,” meaning it reduces your basis in the property whether or not you actually claim it, so skipping it costs you the deduction while still creating a tax bill when you sell.²

Who Qualifies to Depreciate a Rental

The deduction is available for property used in a trade or business or held to produce income.³ Four things have to be true:

You own the property, or you carry the primary financial responsibilities of ownership such as paying for repairs and bearing the risk of loss.
The property is rented or actively offered for rent. A home you live in does not qualify.
The asset has a useful life that can be measured and is longer than one year.⁴
It is not land.

Depreciation begins on the day the property is “placed in service” — the day it is ready and available for rent, not the day a tenant moves in. List a vacant house for rent on October 1 and sign a tenant on December 1, and the clock starts October 1.¹ The deduction keeps running through vacancies, provided you have not converted the property back to personal use. It stops when you fully recover the depreciable cost, sell, exchange, or permanently take the property out of service.

How Long the Deduction Lasts: 27.5 vs. 39 Years

The recovery period turns on how the property is classified. Residential rental property — a building where 80% or more of gross rental income comes from dwelling units — uses 27.5 years.⁵ Nonresidential real property, such as an office building or retail space, uses 39 years.²

Short-term rentals sit on the boundary. A “dwelling unit” under the tax code excludes units in a hotel, motel, or similar establishment where more than half the units are rented on a transient basis.⁵ A property that functions like a hotel, with average guest stays under 30 days and hotel-type services, can fall into the 39-year class. A long-term rental, or a furnished property rented month-to-month, generally clears the 27.5-year test without difficulty.

Figuring Out the Depreciable Amount

The depreciable basis is the dollar figure you spread across the recovery period. Because land cannot be depreciated, you have to split your total investment between the land and the building. The IRS accepts two common approaches:⁶

Use the ratio your local tax assessor already assigns to land and improvements. If the assessment values 20% to land and 80% to the building, apply that ratio to your purchase price.
Hire an appraiser to establish the fair market value of the land and the building separately as of your purchase date.

Your starting basis is the purchase price plus certain settlement costs — title insurance, recording fees, and any back taxes you paid for the seller, among others.¹ Capital improvements you make before placing the property in service, like a new roof or a paved driveway, are added to the building’s depreciable basis. Improvements made later, such as a new HVAC system, are set up as their own assets with their own 27.5-year schedules rather than folded into the original number.

If You Converted Your Own Home Into a Rental

You do not simply use what you paid. The depreciable basis is the lesser of the property’s fair market value on the conversion date or your adjusted basis at that time (original cost plus improvements, minus any casualty loss deductions you previously claimed).¹ If the home has lost value since you bought it, you use the lower fair market value. You still subtract the land portion, and the conversion date is your placed-in-service date.

Inherited or Gifted Property

Inherited rental property gets a stepped-up basis: your depreciable amount is the fair market value on the date of the prior owner’s death, minus land. You start a fresh 27.5-year schedule, and any depreciation the previous owner claimed no longer matters for you.

Gifted property is different. When the fair market value at the time of the gift equals or exceeds the donor’s adjusted basis, you generally take the donor’s basis and continue the donor’s schedule. When the fair market value is lower, the rules for figuring gain and loss split apart, and you use the fair market value for calculating any loss.⁷ Gift tax the donor paid on the net increase in value can add to your basis.

How the Annual Deduction Is Calculated

Residential rental property must use the straight-line method, meaning the same dollar amount each full year, combined with a mid-month convention.¹ The mid-month convention treats the property as placed in service at the midpoint of whatever month you actually start renting it, so the first year gives you a partial deduction.²

Say the depreciable basis is $275,000 and the property is placed in service in July. A full year would produce $10,000 in depreciation ($275,000 ÷ 27.5). Because July counts as half a month, you get 5.5 months in the first year: $10,000 × (5.5 ÷ 12) = $4,583. Years two through twenty-seven give you the full $10,000 each. The final year captures whatever fraction remains. The IRS publishes percentage tables in Publication 946 so you do not have to work the fractions by hand.

Ways to Speed Up the Deductions

You are not stuck spreading every dollar over 27.5 years. A cost segregation study breaks the property into its individual components and reclassifies items that qualify for shorter recovery periods. Carpet, cabinetry, appliances, specialty lighting, and land improvements such as parking lots and landscaping can be pulled off the 27.5-year schedule and onto 5-, 7-, or 15-year schedules. The building shell, walls, roof structure, and in-wall plumbing stay on 27.5 years.

Under the One, Big, Beautiful Bill Act, qualifying business property acquired and placed in service after January 19, 2025, is eligible for 100% first-year bonus depreciation, letting you deduct the entire cost of those reclassified 5-, 7-, and 15-year components in the year they go into service.⁸ The 100% rate is now permanent for qualifying property. Bonus depreciation does not apply to the building itself, only to shorter-lived components identified through cost segregation or purchased separately.

Section 179 offers a separate acceleration path, permitting up to $2,500,000 of qualifying property to be expensed in the year placed in service, with a phase-out beginning at $4,000,000 in total qualifying purchases.⁹ The catch: Section 179 applies only to property used in a trade or business, and most rental activities are treated as investment activities. If your operation rises to the level of a business — for example, you provide substantial services to tenants — Section 179 may be available for items like appliances and furniture.

Whether You Can Actually Use the Loss

Rental real estate is treated as a passive activity no matter how many hours you spend on it.¹⁰ That matters when depreciation and other expenses push you into a paper loss. Passive losses generally cannot offset wages, business profits, or investment income; unused losses carry forward.¹¹p>

There is an important exception. If you own at least 10% of the property and actively participate in managing it — approving tenants, setting rental terms, authorizing repairs — you can deduct up to $25,000 of rental losses against non-passive income each year.¹ The allowance phases out by $1 for every $2 your modified adjusted gross income exceeds $100,000, disappearing entirely at $150,000.¹² Married taxpayers filing separately who lived together at any point during the year cannot use the allowance at all.

Real Estate Professional Status

If you qualify as a real estate professional, your rental activities are no longer automatically passive. Qualifying requires more than 750 hours during the year in real property businesses where you materially participate, and those hours must be more than half of all personal services you perform across all trades or businesses.¹³ You must also materially participate in each rental, or elect to group them. Meeting these tests lets you deduct rental losses without the $25,000 cap or the AGI phase-out.

How to Report It

Depreciation is reported on IRS Form 4562, which records the property description, the placed-in-service date, and the depreciable basis.¹⁴ Attach Form 4562 to your return for the first year a property is placed in service and for any year you add new improvements. In later years with no new assets, most tax software carries the numbers forward automatically, but the accuracy is still on you.

The amount from Form 4562 flows to Schedule E (Form 1040), line 18, and offsets rental income alongside insurance, repairs, property taxes, and other operating costs.¹⁵ If your expenses exceed rental income, the resulting loss runs through the passive activity limits described above, which may mean filing Form 8582 to figure how much you can deduct this year.

If You Never Claimed Depreciation on a Past Return

Do not file amended returns for each missed year. File Form 3115 (Application for Change in Accounting Method) with your current-year return to switch from the impermissible method of claiming no depreciation to the correct method.¹⁶ All the depreciation you should have claimed in prior years is calculated as a single “Section 481(a) adjustment.” When the adjustment is in your favor, you deduct the whole amount on the return for the year of the change. The procedure qualifies for automatic IRS approval and does not require a user fee.

This matters because the IRS reduces your basis by the depreciation you were entitled to claim even if you never claimed it. Fixing the omission before you sell means you at least get the deduction that the recapture rules will tax you on later.

What Happens When You Sell

Selling a depreciated rental triggers depreciation recapture. The total depreciation claimed or allowable during ownership is treated as unrecaptured Section 1250 gain, taxed at a maximum rate of 25%.¹⁷ Gain above that amount is taxed at the applicable long-term capital gains rate — 0%, 15%, or 20% depending on your income.

Suppose you bought a rental building for $300,000 and claimed $60,000 in depreciation before selling. Your adjusted basis is $240,000. Sell for $350,000 and total gain is $110,000. The first $60,000, attributable to depreciation, faces the 25% recapture rate for up to $15,000 in recapture tax. The remaining $50,000 is taxed at your long-term capital gains rate.

The basis reduction applies to depreciation that was allowed or allowable, whichever is greater.² Even if you never took a dollar of depreciation, the IRS calculates recapture as though you had. That is the mechanical reason depreciation is worth claiming every year you own the property: the tax at the back end comes either way, and skipping the deduction just means losing the benefit while still paying the cost.

1
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
2
Internal Revenue Service. Publication 946 (2024), How To Depreciate Property
3
United States Code. 26 U.S.C. 167 – Depreciation
4
Office of the Law Revision Counsel. 26 U.S.C. 168 – Accelerated Cost Recovery System
5
Office of the Law Revision Counsel. 26 U.S.C. 168 – Accelerated Cost Recovery System
6
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
7
Internal Revenue Service. Property (Basis, Sale of Home, etc.)
8
Internal Revenue Service. One, Big, Beautiful Bill Provisions
9
Internal Revenue Service. Instructions for Form 4562 (2025)
10
Internal Revenue Service. Instructions for Form 8582 (2025)
11
Internal Revenue Service. Topic No. 425, Passive Activities – Losses and Credits
12
Office of the Law Revision Counsel. 26 U.S.C. 469 – Passive Activity Losses and Credits Limited
13
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
14
Internal Revenue Service. About Form 4562, Depreciation and Amortization
15
Internal Revenue Service. Instructions for Schedule E (Form 1040)
16
Internal Revenue Service. Instructions for Form 3115
17
Office of the Law Revision Counsel. 26 U.S.C. 1 – Tax Imposed