Depreciation on Rental Property: How to Calculate It

To calculate depreciation on a residential rental, take your cost basis in the building, which excludes the land, and deduct it in equal shares over 27.5 years: 3.636% of that basis for each full year. The first year is prorated by the month the property was ready to rent, so a rental placed in service in May deducts 2.273% in year one. You report the first year on Form 4562 and each year's amount on Schedule E, and if you missed depreciation for two or more years, Form 3115 lets you deduct all of it in one year.

Step 1: Find the building's depreciable basis

Start with the purchase price. Add settlement costs that IRS Publication 527 treats as part of basis, such as abstract fees, legal fees, recording fees, surveys, title insurance, and transfer taxes. Leave out charges for getting a loan, such as points, loan assumption fees, credit report fees, and appraisal fees the lender required.

Next, take out the land, which is never depreciable. Split the total cost between land and building by their fair market values when you bought. If you are unsure of those values, the IRS lets you use the land-to-building ratio from your property tax assessment. Clearing, grading, planting, and landscaping costs usually count as part of the land, so they are not depreciable either. If you rent only part of the property, such as one unit of a duplex you live in, depreciate only the rental part's share of the building basis.

Two situations change the starting number:

• A former home converted to a rental. The house's depreciable basis is the lower of its adjusted basis (generally what you paid for it plus improvements) or its fair market value on the date you converted it, with the land left out as usual.
• Contents and site work bought with the property. Appliances, carpet, and furniture can be depreciated as separate 5-year assets, and land improvements such as fences, roads, and paved parking areas as 15-year assets. A cost segregation study can separate these from a single purchase price.

Step 2: Apply the 27.5-year table

Depreciation starts when the property is placed in service, meaning ready and available for rent, even if no tenant has moved in. In an IRS example, a house that was repaired, ready for rent on July 5, and first rented on September 1 starts depreciating in July.

Residential rental buildings use the straight-line method (equal deductions each year) over 27.5 years with the mid-month convention, which treats the property as placed in service halfway through its first month. Table A-6 in IRS Publication 946 turns that into first-year rates:

From year 2 on, the rate is 3.636% (3.637% in some years after year 9), and the last partial year falls in year 28 or 29. If you sell the rental or convert it to personal use sooner, depreciation stops then, and the final year counts only through the middle of that month.

Worked example

You buy a single-family rental for $360,000 and pay $5,400 of closing costs that belong in basis: $1,900 for title insurance, $1,800 in transfer taxes, $1,400 in legal fees, and $300 in recording fees. Your loan points and the lender's appraisal fee stay out.

1. Total cost: $360,000 + $5,400 = $365,400.
2. Land share: the assessor values the land at $55,000 and the house at $165,000, so land is 25% of the $220,000 total.
3. Land: $365,400 x 25% = $91,350. Building basis: $365,400 minus $91,350 = $274,050.
4. The house is ready to rent on May 12, 2026. Year-1 depreciation: $274,050 x 2.273% = $6,229.
5. Years 2 through 9: $274,050 x 3.636% = $9,964 a year.

The table rates are rounded, so the yearly figure is about a dollar below $274,050 divided by 27.5 ($9,965).

Depreciating improvements you make later

An expense is an improvement, not a deductible repair, if it betters the property (for example, fixing a defect that existed when you bought it, enlarging it, or raising its capacity or quality), restores it (such as replacing a major structural part), or adapts it to a new use. Each improvement is depreciated as a separate asset, starting when it is placed in service, over the period for its class:

• New roof, central heating or air conditioning, windows, or an addition: 27.5 years, using the same table as the building.
• New appliances, carpet, or furniture: 5 years.
• New fence, road, or paved parking area: 15 years.

Replacing the roof for $15,000 in September 2029, for example, adds $159 of depreciation in 2029 ($15,000 x 1.061%) and $545 a year after that ($15,000 x 3.636%), on top of the building's own schedule. Items in the 5- and 15-year classes can also qualify for bonus depreciation, which deducts their full cost in the first year if you acquired them after January 19, 2025; the building and its structural parts cannot.

Three IRS safe harbors let you deduct some costs right away instead of depreciating them:

• De minimis: items costing up to $2,500 per invoice or item, if you also expense them in your own books under a policy you had in place at the start of the year.
• Small taxpayer: for a building with an unadjusted basis of $1 million or less, if your average annual gross receipts are $10 million or less and your repairs, maintenance, and improvements on that building for the year total no more than the lesser of $10,000 or 2% of its unadjusted basis.
• Routine maintenance: recurring work, needed because of the property's use, that keeps the building in its ordinary operating condition and that you expect to do more than once in the 10 years after it is placed in service. Work that betters the property does not qualify.

The first two are elections: you attach a statement to your timely filed original return, including extensions, for each year you use them. The real estate tax deductions checklist lists the repair and operating costs you deduct each year.

Reporting depreciation on Form 4562 and Schedule E

File Form 4562 with your return for the year the rental is first placed in service, and again in any later year you place new property in service, such as the 2029 roof. Residential rental property placed in service that year goes in Part III, Section B, as 27.5-year property using the mid-month (MM) convention and straight-line (S/L) method; on the 2025 form, that is line 19i. You also need Form 4562 every year you claim depreciation on listed property such as a car. In other years, enter each property's depreciation on Schedule E, line 18, and keep your own depreciation worksheet with your records.

How to fix depreciation you missed

Skipping depreciation does not avoid tax. When you sell, your basis is reduced by the depreciation you could have deducted, claimed or not, and the part of your gain from depreciation on the building is taxed at up to 25%. How depreciation recapture works explains that tax at sale. The fix depends on how many returns you filed without the deduction:

• One return. File an amended return (Form 1040-X) for that year. If the missed year is the year the rental was placed in service, either amend that return before you file the next year's return or attach Form 3115 to the next year's return. For a later year, the usual deadline applies: the later of 3 years after you filed the original return or 2 years after you paid the tax.
• Two or more returns in a row. The IRS treats the repeated omission as an accounting method you have adopted, and an amended return cannot change it. File Form 3115, Application for Change in Accounting Method, using the automatic change for depreciation (designated change number 7). Attach it to your timely filed return, including extensions, for the year of change, and send a signed copy to the IRS in Ogden, Utah, no later than the date you file that return. All the depreciation you missed becomes a negative section 481(a) adjustment, a catch-up deduction taken in full that year.

Example: a rental with a $200,000 building basis was placed in service in January 2021, and no depreciation was ever claimed. Missed depreciation through 2025 is $6,970 for 2021 ($200,000 x 3.485%) plus $7,272 a year for 2022 through 2025, a total of $36,058. Filing Form 3115 with the 2026 return deducts that $36,058 in 2026, on top of the regular $7,272 for 2026. The catch-up is reported as a rental expense, so the passive loss rules can limit how much of it lowers your tax that year.

For depreciation's place in a full-year rental tax plan, see tax planning strategies for rental property income.