Depreciation on a rental condo is calculated by dividing the building portion of your cost basis by 27.5 and deducting that amount every year on Schedule E, using the IRS’s Modified Accelerated Cost Recovery System with straight-line recovery.1Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System The deduction reduces your taxable rental income without any cash leaving your pocket, and you formally claim it on Form 4562 in the first year the condo is placed in service.2Internal Revenue Service. About Form 4562, Depreciation and Amortization Getting the starting numbers right matters, because errors compound over the life of the property and resurface as tax when you sell.
Building Your Cost Basis
Your cost basis begins with the purchase price and adds acquisition-related closing costs: title insurance, legal fees, transfer taxes, recording fees, and any loan origination points that weren’t deductible as mortgage interest. Capital improvements made before the unit was first available to rent, such as new flooring or a bathroom remodel, are added as well.3Internal Revenue Service. Topic No. 704, Depreciation
Some costs stay out. Prepaid property taxes, homeowner’s insurance, and your first tenant’s security deposit aren’t part of what you paid to acquire the property. They’re either operating expenses or liabilities, and they belong elsewhere on your return.
Splitting Land From Building
Land doesn’t wear out, so the IRS doesn’t let you depreciate it.4Internal Revenue Service. Publication 527 – Residential Rental Property You have to split your total basis between land and building, and only the building portion enters the calculation.
The most common method uses the local property tax assessment. If the assessor allocates 20% to land and 80% to improvements, apply that same ratio to your purchase price. Condos in multi-story buildings usually carry a smaller land share than single-family homes, because you own only a fractional interest in the underlying lot. That means a larger depreciable basis and a bigger annual deduction.
A professional appraisal produces a more defensible ratio, especially when the tax assessment looks outdated or your purchase price diverges from assessed value. Keep the assessment records or the appraisal report permanently. If the IRS challenges your allocation and you have no documentation, you’re stuck with whatever split the auditor calculates.
Pull out any personal property included in the sale too: furniture, appliances, window treatments. Those items depreciate on a much shorter schedule than the building, so identifying them separately is worth the effort.
The 27.5-Year Calculation
Residential rental property depreciates over exactly 27.5 years under MACRS using the straight-line method. Divide the depreciable building basis by 27.5, and that’s your annual deduction.
Take a condo purchased for $350,000. Subtract $70,000 for land, then pull out $5,000 for appliances. Your depreciable building basis is $275,000. Annual depreciation is $275,000 ÷ 27.5 = $10,000. You claim that same $10,000 on Schedule E in year two, year ten, and year twenty-five. The only years that differ are the first and the last.
The Mid-Month Convention
MACRS treats real property as placed in service at the midpoint of the month you actually start renting it. That trims the first and last years of your holding period.
Place a condo in service in March, and you get 9.5 months of depreciation that first year: half of March plus April through December. On the $10,000 example, that’s $10,000 × (9.5 ÷ 12) = $7,917. A July placement gets 5.5 months, or $4,583. The same logic runs the other way at sale: close in October, and you get credit for 9.5 months of the final year. Total depreciation across the whole holding period still adds up to your full depreciable basis; the convention just stretches the recovery slightly beyond 27.5 calendar years.
Faster Write-Offs for Appliances and Interior Components
Items inside the condo that aren’t structural, such as refrigerators, washers, dryers, and carpeting, fall into shorter MACRS classes, typically five or seven years.4Internal Revenue Service. Publication 527 – Residential Rental Property A $3,000 refrigerator depreciated over five years gives you $600 a year, or potentially the entire amount in year one if bonus depreciation applies.
A cost segregation study pushes this further. An engineer or tax professional inspects the property and identifies components that qualify for shorter recovery periods: decorative lighting, certain flooring, specialty cabinetry, and site improvements like landscaping or parking. Reclassifying part of the building’s value from 27.5 years down to 5 or 15 years produces substantially larger early deductions. The One Big Beautiful Bill restored 100% first-year bonus depreciation for qualified property, which makes segregation more valuable for condo investors looking to front-load write-offs.5Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction
A study isn’t free. Costs run into the thousands, and the payoff depends on how much value can realistically be reclassified. High-value units with significant interior finishes tend to justify the expense; small, basic condos often don’t.
If You Lived in the Condo First
Converting a personal residence to a rental changes how you set the starting number. Your depreciable basis is the lesser of your adjusted basis or the fair market value on the conversion date.6Internal Revenue Service. Publication 551 – Basis of Assets The rule prevents you from depreciating appreciation you haven’t paid tax on.
Adjusted basis is your original purchase price plus capital improvements made while living there (a new kitchen, an added bathroom, replaced windows), minus any casualty losses you claimed. If the condo has appreciated, you’re capped at the lower adjusted basis. If it’s declined, you use the lower fair market value.
An example. You paid $250,000 and put $30,000 into a kitchen, giving you an adjusted basis of $280,000. On the conversion date, the condo is worth $320,000. Because FMV exceeds adjusted basis, you depreciate $280,000 minus the land allocation. Now flip it: if the FMV had dropped to $240,000, you’d start from $240,000 minus land and lose the ability to depreciate everything you put in. Get an appraisal on the conversion date to protect yourself in either direction. The 27.5-year clock starts on that conversion date, not the date you originally bought the condo.
HOA Fees and Special Assessments
Condo ownership carries costs that single-family rentals don’t. The good news on common elements (hallways, lobbies, roof, elevators, parking structures) is that your fractional interest is already inside your purchase price and depreciable basis. It depreciates along with the rest of the building over 27.5 years; there’s nothing separate to calculate.
Regular HOA Dues
Monthly HOA dues on a rental condo are fully deductible operating expenses in the year you pay them. The IRS specifically allows condo owners to deduct dues and assessments paid for maintenance of common elements. Report them on Schedule E alongside property taxes, insurance, and management fees. Dues aren’t depreciated; they reduce rental income dollar for dollar in the current year.
Special Assessments
Special assessments split along the same line that governs any expenditure: repairs are deductible now, improvements are capitalized and depreciated.7eCFR. 26 CFR 1.263(a)-1 – Capital Expenditures; In General Routine maintenance funded by an assessment (repainting common areas, patching a parking lot, fixing an elevator) is a deductible repair. An assessment for a new roof, a lobby renovation, or a replacement boiler is a capital improvement, and your share gets added to your depreciable basis and recovered over time.8Internal Revenue Service. Tangible Property Final Regulations
Assessments often cover both. If the HOA levies $10,000 that pays for $6,000 of roofing and $4,000 of repainting, capitalize the $6,000 and deduct the $4,000. Ask the HOA or management company for a written allocation. Without documentation, the IRS can reclassify the entire deduction as a capital expenditure, and you’ll have no paper trail to argue with.
When the Deduction Gets Suspended
Depreciation frequently creates a paper loss even when cash flow is positive, and the IRS restricts how you can use those losses. Rental income is passive by default, and passive losses generally only offset other passive income, not wages, business earnings, or investment returns.
One exception matters for most small landlords. 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 ordinary income. That allowance begins phasing out when your modified adjusted gross income passes $100,000 and disappears at $150,000.9Internal Revenue Service. Publication 925 – Passive Activity and At-Risk Rules
Above the phaseout, the deduction still exists; it’s just suspended. Unused passive losses carry forward indefinitely and can offset passive income in later years. When you sell the property, accumulated suspended losses release and become deductible against the gain. Taxpayers who spend most of their working time in real property activities can qualify as real estate professionals and bypass the passive limits entirely, but the tests (more than 750 hours in real property work and more than half of all working hours in real estate) are hard to meet for anyone holding a full-time non-real-estate job.
What Happens When You Sell
Every dollar of depreciation you claim reduces your adjusted basis, which increases the taxable gain at sale. The IRS won’t let you take ordinary-income-level deductions during ownership and then pay only long-term capital gains rates on the equivalent amount at sale. The accumulated depreciation is “recaptured” at a higher rate.
The recaptured portion is called unrecaptured Section 1250 gain and is taxed at a maximum federal rate of 25%.10Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed Any remaining gain above the depreciation total qualifies for long-term capital gains rates of 0%, 15%, or 20%, depending on income.11Internal Revenue Service. TD 8836 – Capital Gains, Installment Sales, Unrecaptured Section 1250 Gain
A worked example. You buy a condo for $300,000, allocate $50,000 to land, and depreciate the $250,000 building value. After ten years you’ve claimed $90,909 in depreciation, dropping your adjusted basis to $209,091. You sell for $450,000.
- Total gain: $450,000 − $209,091 = $240,909
- Recapture portion: $90,909 taxed at up to 25%, or up to $22,727 in federal tax
- Remaining gain: $150,000 taxed at your applicable long-term capital gains rate
A 3.8% Net Investment Income Tax layers on top for higher earners: gains from investment real estate hit that surtax when modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly), and the thresholds aren’t indexed for inflation.12Internal Revenue Service. Questions and Answers on the Net Investment Income Tax The sale is reported on Form 4797 and Schedule D.13Internal Revenue Service. Instructions for Form 4797
Allowed or Allowable
Skipping depreciation doesn’t help you avoid recapture. The IRS reduces your basis by the depreciation you were entitled to claim, whether you claimed it or not. This is the “allowed or allowable” rule, and your basis drops by whichever amount is greater.14Internal Revenue Service. Depreciation Recapture15Office of the Law Revision Counsel. 26 USC 1016 – Adjustments to Basis
Own a rental condo for ten years and never claim depreciation, and the IRS still calculates your gain as if you had. You’ll owe the 25% recapture on depreciation you never benefited from. There is no strategic advantage to leaving it on the table.
Fixing Past Mistakes
Wrong basis, wrong recovery period, or no depreciation claimed at all: the fix isn’t amending every prior return. File Form 3115 to request a change in accounting method.16Internal Revenue Service. Instructions for Form 3115
The form triggers a Section 481(a) adjustment, a one-time catch-up that accounts for the difference between what you claimed and what you should have claimed across all prior years. Underclaimed depreciation gives you a lump-sum deduction in the year of filing. Overclaimed depreciation adds the difference to income. One adjustment replaces years of amended returns.
Most depreciation corrections fall under the IRS’s automatic consent procedures, meaning no user fee and no wait for a ruling letter. A tax professional usually handles the filing because the calculation requires reconstructing the full depreciation history and comparing it against the correct schedule. Given the allowed-or-allowable rule, catching an error sooner protects both current deductions and eventual sale proceeds.