How to Depreciate Rental Property (2026)

Depreciation is the single largest tax deduction available to rental property owners — often $8,000–$15,000 per year on a typical single-family rental. But you have to calculate it correctly. Miss the basis step, use the wrong recovery period, or skip the mid-month convention and your Schedule E deduction is wrong. Here's the complete MACRS framework, worked examples, and an interactive calculator to build your own schedule.

What depreciation does — and why the IRS allows it

Under IRC § 168, rental property owners may deduct a portion of the property's value each year as depreciation — even if the property is actually appreciating in the market. The IRS rationale: buildings wear out over time and eventually need to be replaced, so owners are allowed to recover their investment over the asset's "useful life." For tax purposes, that useful life is 27.5 years for residential rental property and 39 years for commercial property.

The practical effect is significant. A $300,000 residential rental (after land) generates roughly $10,900 per year in depreciation deductions for 27.5 years. If you're in the 32% bracket, that's $3,500/year in annual federal tax saved — more than $96,000 over the life of the deduction — purely from a non-cash accounting entry.

Step 1: Determine your depreciable basis

You cannot depreciate land — only the structure. Your first step is computing the depreciable basis, which is the portion of your total cost allocated to the building.

Start with your adjusted cost basis

Your initial basis is the purchase price plus most closing costs you paid — title fees, recording fees, and legal fees are included. Financing costs (points, mortgage fees) are amortized separately, not depreciated.¹

Subtract the land value

Land is not depreciable. You must estimate what portion of the total acquisition cost is land. Three approaches:

• County assessor allocation. Most property tax bills show separate assessed values for land and improvements. Divide the land assessed value by total assessed value to get a land percentage, then apply that percentage to your purchase price.
• Comparable vacant lot sales. If similar bare lots in your area recently sold for $X, that's a defensible land value.
• Appraisal. A formal appraisal at purchase produces the most defensible allocation for high-value properties.

Step 2: Residential vs commercial — 27.5 or 39 years?

The recovery period depends on how the property is used, not how it's financed or structured.²

For a duplex or small apartment building, the 27.5-year rate applies as long as at least 80% of gross rental income is from residential (dwelling) units. If you rent the ground floor commercially and the upper floors residentially and commercial rents dominate, the 39-year period applies to the entire building.

Step 3: The mid-month convention

MACRS uses a mid-month convention for real property (§168(d)(2)). Regardless of what day in the month you actually close, the IRS treats you as placing the property in service at the midpoint of that month. This means your first-year deduction is always less than a full-year deduction — and the amount depends on which month you purchased.³

The year-1 percentage formula: (12 − month + 0.5) / 12 / recoveryPeriod

Step 4: Full-year deductions (years 2 through 27)

After the first partial year, you take exactly 3.636% of your original depreciable basis each year for residential property (2.564% for commercial). The basis never changes due to market value — only due to improvements you add (discussed below).

Note: in the final (28th or 40th) year, only a fractional deduction remains — the mirror image of your first-year stub.

The depreciation deduction goes on Schedule E, Part I — line 18. It is a non-cash deduction: no money leaves your account, but it reduces your taxable rental income.

Improvements increase your depreciable basis

Capital improvements made after purchase are added to your depreciable basis and depreciated on their own MACRS schedule starting when the improvement is placed in service. The original building basis and the improvement each run their own parallel depreciation clock.

The repairs vs. improvements distinction matters. Under the Tangible Property Regulations (Treas. Reg. § 1.263(a)-3), an expenditure that restores, adapts, or betters the property is a capital improvement; routine maintenance that keeps property in its ordinarily efficient operating condition is deductible currently. When in doubt, the "betterment/restoration/adaptation" framework determines the category.

Cost segregation: accelerating components beyond the building schedule

The 27.5-year straight-line schedule applies to the structural components of the building. A cost segregation study identifies portions of that same structure — electrical systems serving personal property, specialty plumbing, floor coverings, landscaping, site improvements — that qualify as 5, 7, or 15-year personal or land improvement property instead of 27.5/39-year real property.

Under OBBBA (effective for property placed in service after January 19, 2025), 100% bonus depreciation on these components is permanently restored.⁴ A $1.4M commercial building might generate $280,000–$420,000 of year-1 deductions through cost segregation — where the straight-line approach would yield only $36,000.

See the Cost Segregation Guide and the Cost Segregation ROI Calculator for the full framework. Cost segregation doesn't eliminate the 27.5-year depreciation clock on the remaining building basis — it accelerates components of that basis into shorter lives.

Depreciation and passive activity rules

The depreciation deduction flows through to Schedule E, but whether it actually reduces your other income depends on the passive activity loss rules (§ 469).

• If you have passive rental income from other properties that exceeds losses, the depreciation deduction offsets it directly.
• If net rental losses result (your total depreciation + expenses exceeds rental income), those losses are generally "passive" and can only offset other passive income — not W-2 or business income — unless an exception applies.
• The $25,000 allowance (§ 469(i)) lets investors with modified AGI below $100,000 deduct up to $25,000 of rental losses against ordinary income; the allowance phases out completely at $150,000 MAGI.
• Real Estate Professional Status (REPS) — 750 hours in real estate + majority of services in real estate — converts all rental losses to non-passive, so depreciation deductions flow directly against any income. See the REPS Guide.
• Suspended losses carry forward until either (a) you have passive income from other rental activity or (b) you sell the property in a fully taxable disposition — at which point all carryforward losses are released against gain.

Interactive depreciation schedule calculator

Enter your property details to see your annual depreciation deduction for every year of the MACRS recovery period.

What depreciation deductions mean at sale — recapture

Every dollar of depreciation you take reduces your basis in the property. When you sell, that reduced basis means a larger recognized gain. The IRS also charges a special recapture tax on the depreciation you've claimed:

• §1250 unrecaptured gain — all the straight-line depreciation on the building structure is taxed at up to 25% (not the normal LTCG rate of 15–20%).
• §1245 recapture — any bonus depreciation taken on cost segregation components is taxed as ordinary income (up to 37%) in the year of sale.

This is not a reason to avoid depreciation — the math almost always favors claiming it. A dollar of depreciation saves 32–37 cents today; the recapture at 25% costs only 25 cents per dollar later. The deferred timing benefit plus the rate differential makes depreciation unambiguously valuable for most investors.

See the full Depreciation Recapture Guide and the Depreciation Recapture Calculator for the complete tax stack on a sale.

Common depreciation mistakes to avoid

• Forgetting to depreciate at all. The IRS computes recapture based on depreciation "allowed or allowable" — meaning if you skipped the deduction, you still owe recapture on what you could have taken. You lose the deduction but don't escape the recapture.
• Including land in depreciable basis. Land is not depreciable. Overestimating the land percentage costs you deductions; underestimating it creates IRS exposure.
• Using the wrong recovery period. A mixed-use building with more than 20% commercial tenant rents is 39 years, not 27.5. The difference compounds significantly over a holding period.
• Depreciating before the property is "placed in service." You must actually have the property available for rent — not just purchased. A property undergoing renovation before the first tenant is not yet in service.
• Not tracking improvement basis separately. Each capital improvement starts its own depreciation clock with its own mid-month convention entry date. If you lump improvements into the original basis, your records will be wrong when you sell.

Work with an advisor who understands REI tax planning

Depreciation is the foundation of rental property tax strategy — but the real planning decisions happen around it: whether cost segregation is worth the study fee, how to combine REPS with depreciation acceleration, how to time sales to avoid recapture, whether a 1031 exchange preserves the tax deferral strategy across properties. These require a financial advisor who genuinely understands real estate tax law, not a generalist.

1. IRC § 1012; Treas. Reg. § 1.1012-1. Closing costs includible in basis: IRS Pub. 551 — Basis of Assets.
2. IRC § 168(c); IRS Pub. 946, Appendix B. Residential vs. commercial recovery period table. IRS Pub. 946 — How to Depreciate Property.
3. IRC § 168(d)(2); Rev. Proc. 87-57, Table 6 (27.5-yr residential) and Table 7 (39-yr commercial). Mid-month convention percentages verified against IRS Pub. 946 Table A-6 and A-7. Values updated as of May 2026 — unchanged from Rev. Proc. 87-57 original publication.
4. One Big Beautiful Bill Act (OBBBA), enacted July 2025. Permanently restored 100% bonus depreciation under IRC § 168(k) for qualified property with recovery period ≤20 years placed in service after January 19, 2025. Building structure (27.5/39-yr real property) is not eligible for bonus depreciation; only personal property and land improvement components qualify.

Tax values and MACRS percentages verified as of May 2026 against IRS Pub. 946 and Rev. Proc. 87-57. Recovery period rules (27.5/39 years) and mid-month convention are statutory under IRC § 168 and have not changed. OBBBA bonus depreciation rules verified against enacted legislation July 2025.