Is Buying a Rental Property Tax Deductible? Depreciation and Basis

Buying a rental property is not tax deductible as a single write-off in the year you close. The IRS treats the purchase price as a capital investment, and you recover the cost of the building through annual depreciation deductions spread over 27.5 years rather than deducting it upfront.¹ Some closing costs do give you an immediate deduction, others get folded into the property’s basis and increase your future depreciation, and a few loan-related fees have to be spread across the life of the mortgage. The full picture is worth understanding before you file your first return.

How You Recover the Purchase Price Through Depreciation

Residential rental property is depreciated under the Modified Accelerated Cost Recovery System using a 27.5-year recovery period, straight-line method, and mid-month convention.¹ Divide the depreciable cost of the building by 27.5 and that is your annual deduction. A building with a $275,000 depreciable basis produces roughly $10,000 in depreciation each year.

The 27.5-year period applies only when 80% or more of the property’s gross rental income comes from dwelling units.² A mixed-use building where commercial tenants pay more than 20% of rent falls under the longer nonresidential recovery period.

Your first year is smaller than a full year. The mid-month convention assumes the property was placed in service at the middle of whatever month it became available for rent.³ Close in July and you get about five and a half months of depreciation for that tax year.

You Cannot Depreciate the Land

Land does not wear out, so it is not depreciable.¹ Before running any numbers, you have to split the purchase price between the building and the lot. The IRS accepts a professional appraisal, an allocation stated in the sales contract, or the ratio of assessed values shown on your local property tax card.⁴ The tax card is the easiest since it already separates land from improvements; an appraisal gives you a stronger position if the allocation is ever questioned.

This split matters. A larger allocation to the building produces bigger annual deductions, but pushing the number too far invites scrutiny, and whatever figures you pick follow the property for the entire time you own it.

Closing Costs You Can Deduct in the First Year

A few items on your settlement statement reduce taxable rental income in the year you close rather than getting spread across decades.

Prorated real estate taxes are the clearest example. When a sale happens mid-year, the property tax bill is divided between you and the seller based on the closing date, and your share (the part covering ownership after the sale) is deductible on that year’s return.⁵

Mortgage insurance premiums paid during the year are deductible as a rental expense on Schedule E. If you paid a lump-sum premium at closing covering the entire policy period, you allocate that cost over the coverage period rather than taking it all in year one.

Closing Costs That Get Added to Your Basis

Several settlement charges have to be capitalized. They are added to your property’s cost basis and depreciated with the building over 27.5 years, so they do give you a tax benefit, just slowly. The IRS lists these capitalizable costs explicitly:²

Abstract and title search fees
Recording fees for the deed and mortgage
Owner’s title insurance
State and local transfer taxes on the sale
Amounts the seller owed that you agreed to pay, such as back taxes or delinquent interest

These items appear on your Closing Disclosure or HUD-1. Capturing every capitalizable dollar means a slightly higher depreciation deduction each year and a lower taxable gain when you eventually sell.

Loan Points and Appraisal Fees Are Treated Differently

This is where new landlords often go wrong. On a primary residence, mortgage discount points can generally be deducted in full the year you pay them if you meet several conditions.⁶ Rentals do not get that treatment. Points paid on a loan for rental property are prepaid interest, deducted ratably over the term of the loan.² On a 30-year mortgage, that is one-thirtieth per year.

Fees for a lender-required appraisal cannot be added to your basis.² They also do not qualify as an immediately deductible operating expense in most cases. Appraisal fees paid at closing for a rental purchase often provide no tax benefit at all, so factor that into your cost planning rather than assuming you will write them off.

Will Your Depreciation Loss Actually Cut Your Tax Bill

Depreciation frequently turns a cash-flow-positive rental into a paper loss on your return. Whether you can use that loss against your salary or other income depends on the passive activity rules. Rental real estate is passive by default, and passive losses generally only offset passive income.⁷

The main exception is the $25,000 special allowance. If you actively participate in managing the rental (approving tenants, setting rent, authorizing repairs) and own at least 10% of the property, you can deduct up to $25,000 in rental losses against nonpassive income each year.⁷ Married filing separately drops the cap to $12,500 for spouses who lived apart the entire year, and to zero for anyone who lived with a spouse at any point during the year.

The allowance phases out with income. Once modified adjusted gross income passes $100,000, the $25,000 shrinks by 50 cents for every dollar above the threshold, disappearing entirely at $150,000 of modified AGI.⁷ Higher earners often cannot use their rental losses in the current year. Those losses are not lost, though; they become suspended passive losses carried forward, usable in a future year against passive income or fully deductible when you sell the property in a taxable transaction.⁸

Repairs and Small Purchases After Closing

Money spent fixing up the property after you close falls into one of two buckets. Repairs (patching drywall, fixing a leaky faucet, repainting) are deductible as rental expenses in the year you pay. Improvements have to be capitalized and depreciated separately.

The IRS uses three tests to identify an improvement: it creates a betterment, restores the property (for example, replacing a major component), or adapts it to a new use.⁹ A new roof is an improvement. Patching a section of shingles is a repair. Keep detailed records of scope, because mid-range projects are the ones auditors question.

For smaller items, the de minimis safe harbor lets you deduct anything costing $2,500 or less per item or invoice in the year of purchase instead of capitalizing it. You make the election on your return.

What Happens to Depreciation When You Sell

Depreciation is not free money. Every dollar you claim reduces your adjusted basis, which increases your taxable gain when you sell.¹ The IRS reduces your basis by the depreciation you were entitled to claim even if you skipped taking it, so there is no upside to declining the deduction.

The portion of your gain tied to prior depreciation is taxed at a maximum rate of 25% as unrecaptured Section 1250 gain, generally higher than the long-term capital gains rate on the rest of the profit.¹⁰ A Section 1031 like-kind exchange into another qualifying investment property can defer both the capital gains tax and the recapture.

Where the Purchase Shows Up on Your First Tax Return

Rental income and expenses go on Schedule E of Form 1040. Depreciation for property placed in service during the year is reported on Form 4562, which asks for the placed-in-service date, the cost basis of the building only (excluding land), and the depreciation method.¹¹ For residential rental property the method is straight-line, the convention is mid-month, and the recovery period is 27.5 years.³

If your rental produced a loss and you want to claim the $25,000 allowance, you will also file Form 8582 to calculate the allowable passive loss. Software handles most of this, but the first year is where basis errors happen, so it is worth checking the inputs yourself.

Keep Your Purchase Records for the Long Haul

The usual three-year retention rule is not enough for a rental. The IRS expects you to keep records related to the property until the statute of limitations expires for the year you dispose of it.¹² In practice, hold onto your Closing Disclosure, settlement statement, appraisal, depreciation schedules, and capital improvement receipts for as long as you own the property plus at least three years after the sale. Losing the original purchase documents makes it hard to prove your basis, and that directly determines the tax you owe on the eventual sale.

1
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
2
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
3
Internal Revenue Service. Instructions for Form 4562 – Introductory Material
4
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
5
Internal Revenue Service. Publication 530 (2025), Tax Information for Homeowners
6
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
7
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
8
Internal Revenue Service. Instructions for Form 8582 (2025)
9
Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions
10
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
11
Internal Revenue Service. Instructions for Schedule E (Form 1040) (2025)
12
Internal Revenue Service. Topic No. 305, Recordkeeping