How Do I Calculate Depreciation on My Rental Property?

To calculate depreciation on rental property, divide the building’s depreciable basis by 27.5 years using the straight-line method the IRS requires for residential rentals.¹ The depreciable basis is the cost of the building only, not the land, plus certain acquisition costs and pre-rental improvements. Get the setup right the first year, because the IRS reduces your basis by the depreciation you were entitled to claim whether you actually claimed it or not.

Step One: Figure Out Your Depreciable Basis

Your starting point is your cost basis, meaning what you paid for the property.² Add the settlement costs on your Closing Disclosure that federal tax law treats as part of the purchase: legal fees, recording fees, title insurance, transfer taxes, and survey costs. These get capitalized into basis rather than deducted as current expenses.

Capital improvements made before the property is available for rent also go into basis. A new roof, upgraded electrical, or a replacement furnace installed before your first tenant arrives adds to the building’s depreciable value. Routine repairs are different. Patching drywall or fixing a leaky faucet is deducted as an operating expense in the year you pay for it.

Step Two: Separate the Building From the Land

Land does not depreciate. The IRS treats it as a permanent asset that doesn’t wear out.³ Before you can run the annual calculation, you have to divide your total cost basis between the building and the land beneath it.

The most common method uses your local property tax assessment, which usually assigns separate values to land and improvements. If the assessor puts 80 percent of the value on the building and 20 percent on the land, apply that ratio to your purchase price. On a $300,000 property, that gives you a $240,000 building basis and $60,000 in land. The IRS describes this as allocating each component based on its share of fair market value.⁴

If the assessment is old or the parcel has unusual features, a professional appraisal can produce a more defensible split. Whichever method you use, document it. The IRS expects a consistent allocation you can back up if audited.

Inherited Property

If you inherited the property, your basis is generally the fair market value on the date the previous owner died, not what they paid for it.⁵ If the estate’s executor elected an alternate valuation date on a federal estate tax return, that date’s value applies instead. You still need to break out the land before depreciating.

Converted From a Personal Home

If you moved out of a home and started renting it, the basis for depreciation is the lesser of two figures: the fair market value on the date of conversion, or your adjusted cost basis on that date.³ Adjusted cost basis is what you originally paid plus permanent improvements, minus any casualty loss deductions you claimed while living there. The rule prevents you from depreciating a decline in value that happened while the home was personal-use.

Step Three: Run the Annual Calculation

Residential rental property uses the straight-line method over a 27.5-year recovery period.¹ Divide the building basis by 27.5. A building basis of $275,000 produces an annual deduction of $10,000.

The Mid-Month Convention

The first and last years are prorated using the mid-month convention. The IRS treats the property as placed in service at the midpoint of the month, regardless of the actual day.⁶ “Placed in service” means ready and available for rent, not the day a tenant moves in.³ If the house was listed and ready to rent in July, depreciation starts in July even if the lease is signed in September.

For year one, take the full annual amount, divide by 12, and multiply by the eligible months. A property placed in service in August gets 4.5 months: half of August plus September through December.⁶ On the $10,000 example, year one is $10,000 × (4.5 ÷ 12), or $3,750. After that, you deduct the full $10,000 each year until you either recover the basis or take the property out of rental service.³ The mid-month rule applies again in the final year.

Faster Write-Offs for Certain Components

The building itself is on the 27.5-year schedule, but many items in and around a rental have much shorter recovery periods. Separating them out, sometimes through a cost segregation study, pulls deductions into the early years of ownership.

Under the general depreciation system, common categories include:³

5-year property: appliances such as stoves and refrigerators, carpeting, and furniture used in the rental.
7-year property: office furniture and equipment, such as desks and filing cabinets, if you maintain an on-site office.
15-year property: land improvements like fences, roads, sidewalks, and shrubbery.
27.5-year property: the building and its structural components, including furnaces, water pipes, and venting systems.

Additions and improvements, such as a new roof or an added bathroom, take the same recovery period as the property they attach to and start fresh on their placed-in-service date.³

Bonus Depreciation After the 2025 Law

The One, Big, Beautiful Bill Act, signed on July 4, 2025, restored 100 percent bonus depreciation for qualifying property acquired after January 19, 2025.⁷ Eligible items such as appliances, carpeting, furniture, and land improvements like fences can be written off in full the first year rather than spread over 5 or 15 years.⁸ The 27.5-year building itself is not eligible; it still depreciates straight-line.

Where to Report It

You use two forms. In the first year a property is placed in service, file Form 4562 to record the placed-in-service date, depreciable basis, and recovery period.⁹ File it again in any later year you add new depreciable items, such as a replacement appliance or a capital improvement.

Each year, your depreciation amount goes on Schedule E (Form 1040), which reports rental real estate income and expenses.¹⁰ Schedule E has a dedicated line for depreciation expense, and the net rental result flows to your Form 1040.¹¹

Fixing Missed Depreciation

If you failed to claim depreciation in prior years, or used the wrong method, the fix isn’t an amended return. File Form 3115, Application for Change in Accounting Method, with your current-year return.¹² A Section 481(a) adjustment lets you catch up all the missed depreciation in a single year instead of amending each old return. The procedural rules are strict, and most owners work with a tax professional on this.

Why You Can’t Skip Depreciation

When you eventually sell, the total depreciation you claimed is taxed as unrecaptured Section 1250 gain at a maximum federal rate of 25 percent, higher than the long-term capital gains rate on the rest of the profit.¹³ If you claimed $80,000 over eight years and sell at a gain, up to $80,000 of that gain is taxed at the 25 percent recapture rate.

Here’s the catch. Federal law reduces your basis by depreciation “allowed or allowable,” whichever is greater.¹⁴ The IRS treats you as having taken the deduction you were entitled to even if you never claimed it. Skipping depreciation gives you nothing during ownership and still produces the same recapture bill at sale. Running the calculation each year is the only way to get the benefit you’re already going to pay for.

1
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
2
Office of the Law Revision Counsel. 26 USC 1012 – Basis of Property Cost
3
Internal Revenue Service. Publication 527, Residential Rental Property
4
Internal Revenue Service. href=”https://www.irs.gov/publications/p527″ target=”_blank” rel=”noopener”>Publication 527, Residential Rental Property
5
Internal Revenue Service. Gifts and Inheritances
6
Internal Revenue Service. Publication 946, How To Depreciate Property
7
Internal Revenue Service. One, Big, Beautiful Bill Provisions
8
Internal Revenue Service. Notice 26-11, Interim Guidance on Additional First Year Depreciation Deduction
9
Internal Revenue Service. Instructions for Form 4562
10
Internal Revenue Service. Instructions for Schedule E (Form 1040)
11
Internal Revenue Service. Schedule E (Form 1040) – Supplemental Income and Loss
12
Internal Revenue Service. About Form 3115, Application for Change in Accounting Method
13
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
14
Office of the Law Revision Counsel. 26 USC 1016 – Adjustments to Basis