How to calculate depreciation on a rental property
Depreciation lets you deduct the cost of a rental building a little at a time, every year, to reflect wear and tear, even in years the property goes up in value. It's one of the biggest tax advantages of owning rentals, and for most investors it's the difference between a property that looks profitable on paper and one that actually shelters income from tax. Here's the method this calculator uses.
1. Separate the land from the building
You can only depreciate the building (the "improvement"), never the land underneath it. So the first step is splitting your purchase price. A common approach is to use the land-to-building ratio from your county property-tax assessment, or the allocation in a recent appraisal. If your $250,000 property sits on land assessed at 20%, then $50,000 is land and $200,000 is your building; that $200,000 (plus any capital improvements) becomes your depreciable basis.
2. Divide by the recovery period
The IRS assigns residential rental property a recovery period of 27.5 years and commercial property 39 years, both using straight-line depreciation, the same amount every full year. So a $200,000 building basis divides to about $7,273 per year for residential ($200,000 ÷ 27.5). That annual figure is the deduction you claim against your rental income each year.
3. Prorate the first year (the mid-month convention)
You rarely buy on January 1st, so your first year is partial. The IRS uses a mid-month convention: property is treated as placed in service in the middle of whatever month you actually started renting it. A property placed in service in July gets about 5.5 months of depreciation in year one, not a full twelve. This calculator applies that convention automatically based on the month you select, which is why your first-year number is smaller than a typical full year.
What you can and can't depreciate
- Depreciable: the building, and capital improvements like a new roof, HVAC, or an addition (these get their own depreciation schedules).
- Not depreciable: land, landscaping tied to the land, and your own labor. Routine repairs aren't depreciated either; they're deducted in full the year you pay them.
Don't forget depreciation recapture
Depreciation isn't entirely free money. When you sell, the IRS "recaptures" the depreciation you took (or were allowed to take) and taxes it, currently at a maximum federal rate of 25%. That's not a reason to skip depreciating; you generally must, and the yearly savings almost always outweigh the recapture. But it's why many investors plan ahead with strategies like a 1031 exchange. This is an estimate tool, not tax advice. Confirm your numbers with a CPA before filing.
Bonus depreciation & cost segregation in 2026
Straight-line depreciation is only part of the picture. A cost-segregation study breaks your building into its faster-depreciating components — appliances, cabinets, flooring, fixtures, and land improvements like fencing and paving — that carry 5-, 7-, or 15-year lives instead of 27.5. Because those pieces have a recovery period of 20 years or less, they qualify for bonus depreciation, which lets you deduct a large share of them in the very first year.
The July 2025 tax law (the One Big Beautiful Bill Act) made 100% bonus depreciation permanent for property acquired after January 19, 2025. Reclassify, say, 25% of a $200,000 building into short-life property and you could deduct about $50,000 in year one instead of spreading it over decades.
Two cautions the calculator above flags, and most online guides skip. First, a deduction only helps if you can use it: passive-activity loss rules (§469) can suspend a rental loss until you have passive income or sell. Second, the amount you accelerate is recaptured as ordinary income (up to 37%) when you sell — not the 25% rate on the building — so on a short hold, after the cost of the study, cost segregation can be close to a wash. Whether it pays off depends on your price, your hold, and your tax situation.
Frequently asked
Can I depreciate a rental I already lived in? Yes. Depreciation starts when the property is placed in service as a rental, using its basis at that point (generally the lower of cost or fair market value).
What if I don't know my land value? Use your latest county assessment's land-to-total ratio and apply it to your purchase price. It's a defensible, widely used method.
Is depreciation optional? Practically, no. The IRS calculates recapture on depreciation "allowed or allowable," so you owe it at sale whether or not you actually claimed it, which means skipping it just throws away the deduction.