Can You Depreciate Rental Property? Schedule, Limits, and Recapture

Yes, you can depreciate a rental property, and for most owners the deduction runs for 27.5 years on a straight-line schedule under the Modified Accelerated Cost Recovery System. Depreciating rental property means deducting the cost of the building and certain improvements a little at a time against your rental income, but never the land beneath it. The deduction sounds like free money on paper, and it isn’t quite: every dollar you claim reduces your tax basis, and the IRS will tax the difference when you sell whether you claimed the deductions or not.

What Qualifies

Four things have to be true before you can depreciate any asset. You have to own it, use it in a business or income-producing activity, expect it to last more than a year, and be able to measure its useful life.¹ Holding legal title counts as ownership even if the bank still has a lien on the building. A rental unit qualifies because it produces income. Your own home does not.

Land is the big exclusion. Land doesn’t wear out, so it has no measurable useful life and can’t be depreciated.² Only the improvements sitting on it qualify: the building, and separately, items like fences, driveways, sidewalks, and landscaping tied to the rental use.

Splitting Your Basis Between Land and Building

Your starting basis is the purchase price plus certain settlement costs: legal fees, recording fees, title insurance, transfer taxes, and any back property taxes you agreed to cover for the seller.³ That total then has to be divided between the ground and the structure, because only the structure depreciates.

The simplest method uses your local property tax assessment. If the assessor attributes 75% of the value to the building and 25% to the land, apply those percentages to your purchase price. A professional appraisal gives a more defensible split and is worth paying for when the assessment looks off or when the numbers are large enough that a few points swing thousands of dollars in annual deductions.

Contents and Site Improvements Depreciate Faster

Appliances, carpeting, and furniture in a residential rental are 5-year property under MACRS, not 27.5-year property like the building.⁴ Fences, sidewalks, roads, and shrubbery fall into a 15-year class.² Basic grading and clearing get treated as part of the land itself and aren’t depreciable. When you buy a furnished rental, allocate part of the price to the personal property so you can recover it on the shorter schedule.

How the 27.5-Year Schedule Actually Works

Under the General Depreciation System, the standard path, a residential rental building is depreciated over 27.5 years using the straight-line method.⁵ Straight-line just means roughly equal deductions each year rather than front-loading.

To count as residential rental property, 80% or more of the gross rental income has to come from dwelling units. A mostly commercial mixed-use building falls into the nonresidential real property class and depreciates over 39 years instead.⁴

Mid-Month Convention and Placed-in-Service Date

Whether you place a property in service on the 1st or the 28th of the month, the IRS treats you as if you started in the middle.² So a property placed in service in March gets 9.5 months of depreciation that first year, and the same partial-month rule applies in the year you sell.

Placed in service means ready and available for rent, not the day a tenant moved in or signed a lease. If you closed in June but the unit didn’t become habitable until August, August is your placed-in-service date. That date drives your first-year deduction under the mid-month rule.

When ADS Is Required

Some owners must use the Alternative Depreciation System, which stretches residential rental property to 30 years. The Tax Cuts and Jobs Act shortened this from a previous 40-year timeline.⁶ Nonresidential real property under ADS is still 40 years.⁵ ADS becomes mandatory in specific situations, including property used predominantly outside the United States, or when a real property trade or business elects out of the interest expense limitation. The annual deductions are smaller, and once you elect ADS for a property, you stay there.

Short-Term Rentals: Watch the Transient Rule

Classification matters if you list on Airbnb or VRBO. A unit in a hotel, motel, or similar establishment where more than half the units are rented on a transient basis is not residential rental property.⁴ That pushes it into the 39-year nonresidential class and slows your deduction. A standalone vacation rental that isn’t run like a hotel generally still qualifies for 27.5 years, though the line can blur for properties managed hotel-style.

Repairs You Deduct Now vs. Improvements You Depreciate

A repair keeps the property in its current condition and comes off your taxes in the year you pay for it. An improvement adds value, extends the property’s life, or adapts it to a new use, and has to be capitalized and depreciated on its own schedule. The IRS uses three tests to decide:⁷

Betterment: the expense materially increases capacity, efficiency, or quality, or fixes a defect that existed when you bought the property.
Restoration: the expense replaces a major structural component or rebuilds the property to like-new condition.
Adaptation: the expense converts the property to a new or different use.

Patching a leaky pipe is a repair. Replacing the whole plumbing system is a restoration. Converting a garage into a studio is an adaptation. The IRS looks at the building system affected, not the building as a whole, so replacing every window on one side of the structure could still count as a major component replacement.

De Minimis Safe Harbor

For smaller purchases, the de minimis safe harbor lets you deduct items costing $2,500 or less per invoice without capitalizing, as long as you don’t maintain audited financial statements.⁷ You have to make the election on your return each year. Handy for a replacement garbage disposal or a new ceiling fan.

Passive Loss Limits Can Trap Your Deduction

Rental income is generally passive, which means rental losses (including the depreciation piece) can normally only offset other passive income. If your rental produces a net loss and you have no passive income to soak it up, the loss carries forward.

The main exception: if you actively participate in managing the rental, approving tenants, setting rent, authorizing repairs, you can deduct up to $25,000 in rental losses against your regular income.⁸ You need to own at least 10% of the property by value.⁹

That $25,000 allowance shrinks by 50 cents for every dollar your adjusted gross income exceeds $100,000, and disappears entirely at $150,000.⁸ Married taxpayers filing separately who lived together at any point during the year cannot use the allowance at all. Filing separately after living apart the whole year gets you a reduced $12,500 allowance with a lower phase-out starting at $50,000.⁹

Taxpayers who qualify as real estate professionals can treat rental losses as non-passive and skip the cap entirely, but the threshold is high: more than 750 hours a year in real property businesses where you materially participate, and that time has to be more than half of all your personal service work.¹⁰ A full-time employee with a rental on the side almost never qualifies.

Recapture Tax When You Sell

Every dollar of depreciation you claim reduces your basis, which increases your taxable gain at sale. The depreciation-related portion of that gain, called unrecaptured Section 1250 gain, gets taxed at a maximum rate of 25%, higher than the long-term capital gains rate on the rest of the profit.¹¹

The trap is the “allowed or allowable” rule. Even if you never claimed a single year of depreciation on your rental, the IRS reduces your basis by the amount you should have claimed.¹² Skipping the deduction doesn’t spare you from the recapture. You pay tax on phantom depreciation you never benefited from. This is the single strongest reason to claim every year you’re entitled to.

Deferring the Bill With a 1031 Exchange

A Section 1031 like-kind exchange lets you roll proceeds from one rental into another without immediately paying tax on the gain, recapture included.¹³ The gain is deferred, not eliminated: your basis in the replacement property carries over from the old one, preserving the deferred gain for later. Cash or non-like-kind property received in the exchange can trigger tax on part of the gain right away.

How to File the Deduction

Newly placed-in-service residential rental property goes on Form 4562, Part III, Section B, line 19i, which is the row designated for 27.5-year residential rental property under the straight-line method.¹⁴ You only need to file Form 4562 in the first year. After that, ongoing depreciation goes straight onto Schedule E of Form 1040, alongside insurance, repairs, and management fees.

Records You Have to Keep

Depreciation records need a longer shelf life than most tax paperwork. The IRS instructs taxpayers to keep property records until the statute of limitations expires for the year you dispose of the property.¹⁵ In practice: hold the purchase contract, settlement statement, basis allocation, and depreciation schedules the entire time you own the rental, plus at least three years after you file the return for the year of sale. If you 1031 into a replacement property, keep the original property’s records too, since the new property inherits the old basis.

Catching Up If You Missed Years

If you’ve owned a rental for several years without claiming depreciation, you don’t amend each old return. You file Form 3115 to request a change in accounting method, which lets you catch up all the missed deductions in a single year.¹⁶ The IRS treats this as switching from an impermissible method (not claiming depreciation) to the correct one. The cumulative Section 481(a) adjustment flows through your current-year return as a negative adjustment against your taxable income.

Because of the allowed-or-allowable rule, filing Form 3115 isn’t optional in any practical sense. The IRS will reduce your basis at sale regardless, so catching up is the only way to actually receive the benefit of deductions you’re going to be charged for anyway. The longer you wait, the larger the adjustment and the messier the math.

1
Internal Revenue Service. Topic No. 704, Depreciation
2
Internal Revenue Service. Publication 946, How To Depreciate Property
3
Internal Revenue Service. Topic No. 703, Basis of Assets
4
Internal Revenue Service. Publication 527, Residential Rental Property
5
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
6
Internal Revenue Service. Tax Cuts and Jobs Act: A Comparison for Businesses
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Internal Revenue Service. Tangible Property Final Regulations
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Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
9
Internal Revenue Service. Instructions for Form 8582, Passive Activity Loss Limitations
10
Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules
11
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
12
Internal Revenue Service. Depreciation and Recapture
13
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
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Internal Revenue Service. Form 4562, Depreciation and Amortization
15
Internal Revenue Service. How Long Should I Keep Records?
16
Internal Revenue Service. Instructions for Form 3115