How to Calculate Depreciation on a Rental Property: Formula and Basis

To calculate depreciation on a rental property, divide the building portion of your cost basis by 27.5. That gives you the annual deduction you can subtract from rental income every full year you own the property. A building basis of $275,000 produces a $10,000 yearly deduction. The math is simple; the work is in getting the inputs right: separating land from building, pulling the correct figures from your closing statement, and prorating the first year with the mid-month convention.

The Formula

Residential rental property placed in service after 1986 uses straight-line depreciation over a 27.5-year recovery period under the Modified Accelerated Cost Recovery System.¹ The deduction is the same every full year:

Annual depreciation = Building cost basis ÷ 27.5

Buy a rental for $350,000, and if the building portion is $280,000 after taking out land value, your annual deduction is $280,000 ÷ 27.5 = $10,182. That figure repeats every full year. The first year and the year you dispose of the property are smaller because of the mid-month convention.

Nonresidential rental property uses a 39-year recovery period, which produces a smaller annual number.¹ Everything below is for residential rentals.

Building Your Cost Basis

Cost basis is the full capital investment, not just the sale price. Start with what you paid, then add the settlement costs the IRS requires you to capitalize instead of deducting as current expenses.² Items that go into basis include:

Abstract fees, title search fees, and title insurance premiums.
Attorney fees for preparing the deed and sales contract, and the fee to record the deed.
Transfer taxes and property survey costs.
Any delinquent real estate taxes or mortgage interest the seller owed that you paid at closing and were not reimbursed for.

Not every closing-statement line item counts. Appraisal fees, credit report charges, and loan origination fees are generally excluded from basis.² Pull your HUD-1 or Closing Disclosure and read it line by line. A few hundred dollars in caught fees compounds across 27.5 years of deductions.

Converting a Home You Already Own

If you’re turning a former primary residence into a rental, your depreciable basis is the lesser of your adjusted basis or the fair market value on the date of conversion.³ Bought for $400,000 but the home is worth $320,000 when you start renting it? You depreciate off the $320,000 (less land), not your purchase price. When fair market value is higher than your adjusted basis, you use the adjusted basis.

Inherited Property

Property acquired from a decedent gets a stepped-up basis equal to its fair market value on the date of death.⁴ The depreciation clock resets. If a parent bought a rental for $150,000 and it was worth $400,000 at death, you start a fresh 27.5-year schedule on the $400,000 (less land). Any depreciation the prior owner claimed doesn’t carry over.

Separating Land From Building

Land doesn’t depreciate because it doesn’t wear out. Before running the formula, you have to pull the land value out of your total basis. The IRS accepts your local property tax assessment as a reasonable allocation method. If the assessor values the land at 20% and the building at 80% of total assessed value, apply that same 80/20 split to your cost basis.⁵

A property with a $300,000 basis and an 80/20 assessment split gives you $240,000 depreciable building value and $60,000 of land that sits untouched. If the tax assessment looks off, a professional appraisal is a valid alternative, and appraisers can price your lot against nearby vacant-land sales to isolate the land figure. Either way, keep the documentation. The IRS can challenge your allocation, and a paper trail settles those conversations quickly.

The Mid-Month Convention

You rarely place a property in service on January 1st, so the IRS treats the property as though it went into service at the midpoint of whatever month you actually started.¹ The same rule applies to the year you sell or convert to personal use.

First-year math for a $275,000 building basis placed in service in August:

Full-year depreciation: $275,000 ÷ 27.5 = $10,000
Monthly depreciation: $10,000 ÷ 12 = $833.33
Months in service: mid-August through December = 4.5 months
First-year deduction: $833.33 × 4.5 = $3,750

Sell in March of the disposal year, and you get 2.5 months of depreciation for that final year. IRS Publication 946 has percentage tables that give you the first-year rate for each month, so you don’t have to run the arithmetic yourself.⁵

When the Clock Starts

The depreciation clock starts on the date the property is “placed in service,” meaning ready and available for rent. An actual tenant is not required. Finish repairs and list the property on August 10th, and it’s in service on that date even if the first tenant doesn’t move in until October.⁵ What matters is that the property is habitable and actively marketed.

Depreciation continues until you recover the full basis over 27.5 years, sell the property, or convert it to personal use.³ Brief vacancies between tenants don’t stop the clock as long as you’re still holding the property out for rent.

Improvements Get Their Own Schedule

Anything you spend on the property after purchase is either a repair or an improvement. Repairs get deducted in the year you pay them. Improvements get added to basis and depreciated on a new 27.5-year schedule that runs alongside the original one.

The IRS uses three tests, and if any one applies, the cost is an improvement that must be capitalized:⁶

Betterment: fixing a pre-existing defect, adding to the structure, or materially increasing capacity, efficiency, or output. Adding a bedroom or replacing all the plumbing qualifies.
Restoration: replacing a major component or substantial structural part, or returning a property in disrepair to working condition. A new roof is the standard example.
Adaptation: changing the property to a new or different use, such as converting a garage into a rental unit.

Routine work like patching drywall, repainting, fixing a leaky faucet, or replacing a broken window pane is a deductible repair. The line gets genuinely murky for mid-range projects like replacing one HVAC unit in a multi-unit building, so keep detailed records of what was done and why.

For smaller purchases, the de minimis safe harbor election lets you expense items up to $2,500 apiece without capitalizing them. Landlords with audited financial statements can use a $5,000 threshold.⁷

Reporting the Deduction

Annual depreciation goes on Form 4562 (Depreciation and Amortization), which attaches to Schedule E of your return.⁸ File Form 4562 in the first year the property is placed in service and in any later year you place a new improvement or asset in service. In years with no new additions, the deduction flows through Schedule E directly.

Keep a depreciation schedule for each property showing the placed-in-service date, cost basis, land-building allocation, and cumulative depreciation claimed. If you own multiple properties or have layered improvements running on separate 27.5-year clocks, hand-tracking gets messy. Most tax software handles the running totals, but the inputs still have to be right.

Take the Deduction Every Year

One rule surprises new landlords: depreciation is not optional. When you sell, the IRS reduces your basis by the depreciation you were “allowed or allowable,” whether or not you actually claimed it.³ Skipping the deduction gives you no tax savings during ownership and still triggers depreciation recapture at sale, taxed at up to 25% federally. Run the formula, take the deduction, and keep the paperwork.

1
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
2
Internal Revenue Service. Publication 551 – Basis of Assets
3
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
4
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
5
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
6
Internal Revenue Service. Tangible Property Final Regulations
7
Internal Revenue Service. Increase in De Minimis Safe Harbor Limit for Taxpayers Without an AFS
8
Internal Revenue Service. Tips on Rental Real Estate Income, Deductions and Recordkeeping