How Do You Depreciate a Rental Property?

To depreciate a residential rental, you take the building's basis (what you paid plus most closing costs, minus the value of the land) and deduct it in equal amounts over 27.5 years, starting in the month the property is ready and available for rent. A full year's deduction is 3.636% of the building's basis, and the first year is prorated by month. A building with a $261,200 basis produces about $9,497 of depreciation a year. Depreciation is not optional: the IRS reduces your basis by the depreciation you were entitled to take, whether or not you claimed it.

Step 1: Figure the building's depreciable basis

Start with the purchase price, including any mortgage you assume. Then add the settlement costs that IRS Publication 527 says belong in basis:

• Abstract fees and legal fees for the purchase
• Recording fees, surveys, and transfer taxes
• Title insurance
• Charges for installing utility services
• Amounts the seller owed that you agreed to pay, such as back property taxes or the seller's sales commission

Leave out fire insurance premiums, rent you paid to occupy the home before closing, and loan costs such as points, credit report fees, and a lender-required appraisal. Amounts put into escrow for future taxes and insurance stay out too.

Next, subtract the land. Land is never depreciated, so you split the total cost between land and building based on their fair market values when you bought. If you aren't sure of those values, the IRS lets you use the ratio from your property tax assessment.

If you inherited the property or converted your home

• Inherited property: your basis is generally the property's fair market value on the date the previous owner died (or the estate's alternate valuation date). If the estate filed an estate tax return and sent you a Schedule A (Form 8971), you generally must use the value it reports. You then subtract the land share, the same as for a purchase.
• A former home you now rent out: your basis for depreciation is the lower of the building's fair market value on the date you converted it or your adjusted basis (original cost plus improvements, minus any casualty losses you deducted). If the home is worth less than you paid, the lower current value is your basis.

Step 2: Find the date it was placed in service

Depreciation starts when the property is ready and available for rent, even if it sits vacant for a few months. A house you are still renovating is not placed in service until the work is done and you offer it for rent. For a converted home, the start date is the day you began offering it for rent.

Step 3: Apply the 27.5-year schedule

Residential rental buildings use the straight-line method over 27.5 years with the mid-month convention, which treats the property as placed in service in the middle of its first month. The IRS percentage table in Publication 527 builds that in. The first-year rate is the months of use (counting the first month as half) divided by 12, times 3.636%:

Worked example. You buy a single-family rental for $320,000 and pay $6,500 in closing costs that belong in basis, for a total of $326,500. The tax assessment values the land at 20% of the property, so the land is $65,300 and the building basis is $261,200. The house is ready and listed for rent in June 2026.

• 2026 depreciation: $261,200 x 1.970% = $5,145.64
• 2027 through 2052: $261,200 x 3.636% = $9,497.23 a year
• 2053, the 28th tax year: the remaining basis, about $9,100, covering the last 11.5 months

Appliances, carpet, and furniture you buy for the rental are separate assets on a 5-year schedule, and they may qualify for 100% bonus depreciation. See how long each depreciation period lasts for those schedules and the Section 179 deduction for another way to write them off faster.

How do you depreciate improvements you add later?

Each addition or improvement is depreciated as its own asset. It uses the same recovery period as the property it improves, starting in the month the improvement is placed in service, so a new roof on a rental house gets its own 27.5-year schedule.

Example. In April 2028 you pay $18,000 to replace the roof on the house above. The roof is depreciated at the April rate of 2.576% for 2028 ($463.68) and at 3.636% a year after that ($654.48). The original building keeps its own schedule unchanged.

Improvements to the land around the building follow the land improvement rules instead: fences, driveways, and walkways use a 15-year period. Shrubbery uses 15 years only if it has a determinable useful life; otherwise, its cost is part of the nondepreciable land. Work that only keeps the property in good repair is deducted the year you pay it rather than depreciated. Capital expenses versus repairs covers how to tell the difference and the safe harbors that let you deduct some improvements right away.

Which forms do you file?

• Form 4562: required for the year you place the rental (or any new improvement or asset) in service. The building goes in Part III on line 19i, residential rental property, with the month and year placed in service, a 27.5-year period, the "MM" (mid-month) convention, and the "S/L" (straight-line) method.
• Schedule E (Form 1040), line 18: the year's total depreciation for each property, every year.
• Your own depreciation schedule: a list of each asset with its basis, start date, method, and depreciation taken to date. Use this record to carry the numbers forward each year. Even without new assets, Form 4562 is required if you claim vehicle expenses on Schedule E (including standard mileage or lease expenses), deduct a section 179 carryover, or begin amortization (deducting certain costs over a set period).

Depreciation can push a rental to a tax loss even when the rent covers your cash costs. Whether you can use that loss against other income depends on the passive activity rules; see what to do when rental expenses exceed income.

Why does unclaimed depreciation still count against you?

When you sell, your gain is the sale price minus selling expenses and your adjusted basis, and that basis is reduced by depreciation "allowed or allowable." The IRS lowers your basis by the depreciation you could have claimed even if you never claimed it. In the example above, skipping depreciation for 5 full years would still cut the building's basis by about $47,486 ($9,497.23 x 5). The part of your gain that comes from depreciation on the building, called unrecaptured section 1250 gain, is taxed at a rate of up to 25%. This gain cannot exceed your actual gain on the sale; a sale at a loss produces no unrecaptured section 1250 gain.

If you missed depreciation, you can usually fix it. Publication 946 allows an amended return in limited cases, such as if you have filed only one return using the wrong treatment. After two or more returns, the fix is generally a change in accounting method, requested on Form 3115.

For the other deductions available to landlords, see what rental expenses you can deduct.