Residential rental property has a depreciation life of 27.5 years under the Modified Accelerated Cost Recovery System (MACRS).1Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System You take the depreciable value of the building, divide it by 27.5, and deduct that amount from your rental income each year. No cash leaves your pocket, which is why this deduction is the most valuable ongoing tax benefit of owning a rental.
What Qualifies for the 27.5-Year Schedule
A building uses the 27.5-year life only if at least 80 percent of its gross rental income comes from dwelling units.2Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System – Section: Residential Rental Property Single-family houses, duplexes, apartments, and rented condominiums clear that bar without effort. A mixed-use building with a ground-floor shop still qualifies as long as the residential rents make up 80 percent or more of the revenue.
Fall below that threshold and the property is classified as nonresidential real property, which stretches the recovery period to 39 years.1Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System The longer schedule produces a noticeably smaller annual deduction, so the classification is worth getting right.
Finding the Depreciable Basis
Before dividing by 27.5, you need to know what portion of your investment can actually be depreciated. The depreciable basis includes the purchase price plus allowable closing costs and any capital expenditures made before the property is ready for tenants.
Then subtract the land. Land never depreciates because it doesn’t wear out or become obsolete.3Internal Revenue Service. Topic No. 704, Depreciation Buy a property for $350,000 with land worth $75,000 and your depreciable basis is $275,000. Overstate the building portion and you overstate the deduction, which draws IRS attention.
Most owners split land and building using the local property tax assessment, which usually assigns separate values to each. If the assessment treats 25 percent of the value as land, apply that same 25 percent to your actual purchase price. A professional appraisal as of the purchase date is more defensible if the IRS pushes back on the allocation.
Converting a Home You Lived In
When you turn a personal residence into a rental, you don’t automatically use what you paid. The depreciable basis is the lower of your adjusted basis in the property or its fair market value on the date of conversion.4Internal Revenue Service. Publication 527 – Residential Rental Property If you bought the house for $300,000 but it’s worth $260,000 when it becomes a rental, you depreciate the $260,000 figure (minus land). The loss in value between purchase and conversion doesn’t turn into a depreciation deduction.
Inherited Rental Property
Inherit a rental and the depreciable basis generally resets to the fair market value on the previous owner’s date of death. That stepped-up basis is often much higher than what the decedent originally paid, and a fresh 27.5-year clock starts on the new figure. Land still comes out of the calculation before you divide.
Running the Annual Calculation
Residential rental buildings must be depreciated using the straight-line method.5Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System – Section: Straight Line Method Accelerated methods are not available for the structure itself. Divide the depreciable basis by 27.5 and you have the annual deduction. A $275,000 basis produces $10,000 a year.
First and last years follow a mid-month convention.6Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System – Section: Mid-Month Convention The property is treated as placed in service at the midpoint of the month it becomes available for rent. Place it in service in November and you get one and a half months of depreciation that year. Sell in July and you claim six and a half months for the final year. When a tenant physically moves in is not the trigger; what matters is when the unit is ready and available.
Report the annual figure on Form 4562, Depreciation and Amortization.7Internal Revenue Service. Instructions for Form 4562 From there it flows to Schedule E and reduces your net rental income.8Internal Revenue Service. Schedule E (Form 1040) – Supplemental Income and Loss
Items That Depreciate Faster Than the Building
The 27.5-year life covers the structure and its permanent components. Many things in and around a rental sit in shorter MACRS classes:
- 5-year property: appliances, carpeting, window treatments, and similar items you could remove.
- 7-year property: office furniture and equipment used to manage the rental.
- 15-year property: land improvements such as fences, driveways, sidewalks, and septic systems.
Shorter schedules recover cost far faster than the building timeline.4Internal Revenue Service. Publication 527 – Residential Rental Property A $3,000 refrigerator depreciated over 5 years yields roughly $600 a year. Rolled into the building’s 27.5-year schedule, the same $3,000 produces only about $109 a year.
Capital improvements that add value or extend the building’s useful life, such as a new roof or a complete HVAC replacement, get their own 27.5-year schedule starting when the work is finished.9Internal Revenue Service. Depreciation and Recapture 4 Each improvement runs on its own clock, independent of the original building’s schedule.
Cost Segregation Studies
A cost segregation study is an engineering analysis that pulls components out of the 27.5-year bucket and reassigns them to the 5-, 7-, or 15-year classes. Specialty electrical, decorative finishes, and certain plumbing can often be reclassified. The trade-off is cost: these studies typically run $5,000 to $15,000 for a single-family rental, so they tend to pay off only on higher-value properties.
Bonus Depreciation and Section 179
Following the One Big Beautiful Bill Act, qualifying business property acquired and placed in service after January 19, 2025, is eligible for 100 percent bonus depreciation.10Internal Revenue Service. One, Big, Beautiful Bill Provisions For a rental owner, that means the shorter-lived assets, including anything reclassified by a cost segregation study. The 27.5-year building itself does not qualify.
Section 179 lets you expense certain tangible personal property immediately. In 2026 the maximum deduction is $2,560,000. Eligible items on a rental include appliances, furniture, carpeting, and removable fixtures, but not the building or its structural systems. Two catches apply: the rental activity must rise to the level of a trade or business with active, regular management, and the deduction cannot exceed your net rental income for the year.
What Happens When You Sell
Depreciation reduces your tax bill every year you hold the property, and the IRS recovers a share of that benefit at sale. The total depreciation you claimed (or should have claimed) is taxed as unrecaptured Section 1250 gain at a maximum federal rate of 25 percent.11Office of the Law Revision Counsel. 26 U.S. Code 1 – Tax Imposed Any additional gain is taxed at the long-term capital gains rates, which top out at 20 percent for most taxpayers.
Recapture applies whether or not you actually took the deduction. The IRS reduces the property’s basis by depreciation that was “allowed or allowable,” meaning the amount you were entitled to deduct even if you never claimed it.12Internal Revenue Service. Depreciation and Recapture 3 Skipping the deduction each year saves nothing at sale; it just means you paid more tax along the way without lowering the recapture bill. Report the calculation on Form 4797, Sales of Business Property.13Internal Revenue Service. Instructions for Form 4797 – Sales of Business Property
A Section 1031 like-kind exchange is the standard way to postpone the recapture hit. If you reinvest the sale proceeds into another qualifying rental or investment property within the IRS timelines, both the capital gains tax and the depreciation recapture tax can be deferred indefinitely.14Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment The deferred depreciation carries over into the replacement property’s basis, so the liability travels with you rather than disappearing.