How to Claim Depreciation on Rental Property: Basis to Recapture

To claim depreciation on rental property, split your total cost between land and building, divide the building portion by 27.5 years using the IRS mid-month convention, and report the annual figure on Form 4562 and Schedule E of your federal return. The deduction runs automatically once you set it up correctly in year one, and the IRS reduces your property’s tax basis by the depreciation you were entitled to take whether you actually claimed it or not, so getting the setup right matters.

When Depreciation Starts and What Qualifies

Federal law allows a depreciation deduction for property used in a trade or business or held to produce income, provided its useful life extends beyond one year.¹ For a rental, that means the building itself. Land never qualifies, because land doesn’t deteriorate.

Depreciation begins when the property is “placed in service,” meaning ready and available for rent. You don’t need a signed lease. If renovations finish in March and you list the unit that month, March is your start date even if the first tenant moves in during June.² If you later pull the property off the market for personal use, depreciation pauses for that period.

One boundary worth knowing before you assume the 27.5-year residential period applies: a building where more than half the units are rented on a transient basis, or where less than 80 percent of gross rental income comes from dwelling units, is classified as nonresidential real property and depreciated over 39 years instead.² Vacation rentals with mostly short stays can fall on the wrong side of that line.

Figuring Your Depreciable Basis

Your basis starts with the purchase price and grows to include closing costs that become part of the property’s cost: title insurance, recording fees, survey charges, transfer taxes, and any back property taxes the seller owed that you agreed to cover.³ Most of these appear on your closing disclosure. Add them to the purchase price for your total acquisition cost.

Next, split that total between land and building. Only the building portion is depreciable. The IRS accepts two common approaches: use your local property tax assessment’s percentage breakdown, or get an independent appraisal. If the assessor values the land at 25 percent and improvements at 75 percent, apply those ratios to your total cost.³ On a $300,000 total, that gives you a $225,000 depreciable building basis and $75,000 of non-depreciable land.

Inherited property works differently. Your starting basis is generally the fair market value on the date of the prior owner’s death, not what they paid.³ The prior owner’s depreciation history resets, and you begin a fresh 27.5-year schedule on the land-adjusted stepped-up value.

Calculating the Annual Deduction

For residential rental property placed in service after 1986, the IRS requires the Modified Accelerated Cost Recovery System: straight-line method, 27.5-year recovery period.⁴ Divide your depreciable building basis by 27.5 for a full-year deduction. On $225,000, that’s $8,181 per year.

The first and last years use the mid-month convention. The IRS treats you as placing the property in service at the midpoint of whatever month you actually started renting. Place a property in service in September and you get three and a half months of depreciation that year (half of September plus October, November, December). Multiply full-year depreciation by eligible months divided by 12.⁵ IRS Publication 946 includes percentage tables organized by the month you placed property in service, which handle the math for you. The same logic applies in the year you sell or stop renting.

Other Rental Assets Depreciate Faster

The building isn’t the only depreciable asset. Items inside and around the property have their own recovery periods, which mean larger annual deductions.

5-year property: appliances such as stoves and refrigerators, carpeting, and furniture used in the rental.
15-year property: land improvements such as fences, roads, and driveways.
27.5-year property: the residential building itself.

These categories come from Table 2-1 of IRS Publication 527.² Tracking them separately from the building pays off: a $3,000 refrigerator depreciated over 5 years gives you $600 per year, compared with about $109 if you lump it into the 27.5-year building.

Under the One, Big, Beautiful Bill signed into law in 2025, 100 percent bonus depreciation is permanently available for qualifying property acquired after January 19, 2025.⁶ Bonus depreciation applies only to property with a recovery period of 20 years or less.⁷ Your 5-year appliances and 15-year fences qualify. The building at 27.5 years does not, so straight-line over the full 27.5-year period stays in place regardless of when you acquired it.

Repairs vs. Capital Improvements

The line between a deductible repair and a capital improvement is one of the most audit-prone areas in rental returns. A repair maintains the property in its current condition: fixing a leaky faucet, patching drywall, replacing a broken window. Deduct repairs in full the year you pay. An improvement adds value, adapts the property to a new use, or substantially extends its life: a new roof, a kitchen remodel, a new deck. Improvements must be capitalized and depreciated over the appropriate recovery period.

The IRS de minimis safe harbor election simplifies smaller expenses. Without audited financial statements (most individual landlords have none), you can elect to expense items costing $2,500 or less per invoice or per item, even if they’d otherwise be capital improvements. Landlords with audited financial statements can use a $5,000 threshold.⁸ You make the election annually by attaching a statement to your timely filed return. A $400 garbage disposal replacement then skips the depreciation schedule and comes off as an expense.

Filing the Deduction on Form 4562 and Schedule E

You calculate the deduction on Form 4562, Depreciation and Amortization, using Part III for MACRS property. For a residential rental building placed in service during the current tax year, enter the depreciable basis in column (c) of line 19; the form walks you through the method (straight-line), convention (mid-month), and recovery period (27.5 years).⁹ For property placed in service in a prior year that’s still being depreciated, you don’t need to file Form 4562 again. Carry the annual figure forward.

The depreciation amount from Form 4562 goes on line 18 of Schedule E, Part I, where it combines with other rental expenses like insurance, repairs, and property taxes. The net income or loss from Schedule E flows to Schedule 1 (Form 1040), line 5, and into the rest of your return.¹⁰ If you’re using the passive activity loss allowance to offset non-passive income, you’ll also need Form 8582 to calculate the permitted deduction. Electronic filing reduces processing delays and transcription errors.

How Much of the Depreciation Loss You Can Actually Use

Depreciation often pushes rental income into a paper loss, and the IRS limits how much of that loss you can use against your other income. Rental real estate is a passive activity by default, so losses generally only offset other passive income. The exception: if you actively participate in managing the rental (making decisions about tenants, approving repairs, setting rent), you can deduct up to $25,000 in rental losses against non-passive income like wages.¹¹

That $25,000 allowance phases out as modified adjusted gross income rises above $100,000. For every $2 of MAGI above $100,000, the allowance drops by $1. By $150,000 MAGI, it’s gone. Married taxpayers filing separately who lived together at any point during the year get a reduced $12,500 allowance that phases out starting at $50,000 MAGI.¹¹ Losses you can’t use in the current year carry forward, offsetting passive income later or releasing fully when you sell in a taxable transaction.

Fixing Missed Depreciation from Prior Years

If you forgot to claim depreciation in earlier years, you generally can’t just amend the old returns. Instead, file Form 3115, Application for Change in Accounting Method, using designated change number 7. This requests a switch from an impermissible method (taking zero depreciation) to the correct one, and catches you up through a Section 481(a) adjustment covering everything you missed.¹²

Under the automatic change procedures, attach Form 3115 to your timely filed return (including extensions) for the year of change, and send a copy to the IRS National Office. No user fee applies to automatic changes. The catch-up amount is generally spread over four tax years. This matters because the IRS reduces your basis by the depreciation you were entitled to take whether you took it or not, so skipping the correction means losing the deduction while still owing more tax when you sell.²

What Depreciation Costs You at Sale

Every dollar of depreciation you claim (or should have claimed) comes back into play when you sell. The IRS taxes the depreciation-related portion of your gain as unrecaptured Section 1250 gain at a maximum federal rate of 25 percent, rather than the lower long-term capital gains rates that apply to the rest of your profit.¹³ If your ordinary rate is below 25 percent, you pay your marginal rate on that portion.

An example: you buy a rental for $300,000, allocate $225,000 to the building, and claim $65,000 in total depreciation over the years. Your adjusted basis is $235,000. Sell for $400,000 and total gain is $165,000. The first $65,000, matching cumulative depreciation, is taxed at up to 25 percent. The remaining $100,000 is taxed at your applicable long-term capital gains rate. You report these figures on Form 4797, Part III.¹⁴ A 1031 like-kind exchange can defer both the recapture and capital gains taxes, but that’s a separate planning decision.

Records to Keep

Keep all records related to the rental property until the period of limitations expires for the tax year in which you dispose of the property, not just the year you started depreciating.¹⁵ The standard limitations period is three years from the filing date, six years if you underreport income by more than 25 percent. So a landlord who owns a rental for 20 years and then sells it needs the original closing documents, the land-versus-building allocation, and the annual depreciation schedules for the entire ownership period plus at least three years after filing the sale return. Keeping the settlement statement, tax assessment records, and a running depreciation schedule together in one file makes any future IRS question straightforward to answer.

1
Office of the Law Revision Counsel. 26 USC 167 – Depreciation
2
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
3
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
4
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
5
Internal Revenue Service. Publication 946 (2024), How To Depreciate Property
6
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
7
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
8
Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions
9
Internal Revenue Service. Instructions for Form 4562 (2025)
10
Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040)
11
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
12
Internal Revenue Service. Instructions for Form 3115, Application for Change in Accounting Method
13
Internal Revenue Service. Property (Basis, Sale of Home, Etc.) 5
14
Internal Revenue Service. Instructions for Form 4797 – Sales of Business Property
15
Internal Revenue Service. How Long Should I Keep Records?