Rental Property Depreciation: What a $350,000 Rental Deducts

Depreciation is the largest deduction most landlords have, and the only one that costs nothing in cash. The IRS lets you deduct the cost of a rental building over 27.5 years, so a typical single-family rental produces a five-figure deduction every year while the house, in most markets, is quietly going up in value.

It is also the deduction landlords get wrong most often — in three directions. Some take it on the full purchase price, including the land, which cannot be depreciated. Some don't take it at all, not realising the IRS will tax them on it anyway when they sell. And many assume a paper loss from depreciation will cut their salary's tax bill, when a set of income limits decides whether it can.

This guide works through one rental from purchase to sale with real numbers. It is for U.S. individual landlords with long-term residential rentals reporting on Schedule E. It does not cover commercial property (39 years), real estate professionals, or the separate rules for short-term rentals, which we touch on only briefly — those cases change the answer enough to need their own guide.

The basicsWhat you can depreciate, and over how long

A residential rental is depreciated in equal amounts over 27.5 years under the General Depreciation System. Three rules decide the number:

1. 01Only the building. Land never wears out, so its value is excluded. Your basis is what you paid, plus most closing costs, minus the land.
2. 02It starts when the property is ready to rent, not when you bought it or when the first tenant moved in. A house bought in March and listed for rent in July starts in July.
3. 03The first and last years are partial. The mid-month convention treats the property as placed in service — and as sold — in the middle of the month.

The exampleA $350,000 rental, start to finish

Take a single-family house bought for $350,000, with the county assessor valuing the land at $70,000. The depreciable building is $280,000, and the full-year deduction is $280,000 ÷ 27.5 = $10,182.

The month you place it in service changes only the first year:

The land value matters more than most people expect. The same $350,000 purchase deducts $11,455 a year if land is 10% of the price, and $7,636 if it is 40% — common in expensive coastal markets, where the land is most of what you are paying for. The IRS accepts a reasonable method; the most common is the ratio of land to total value on your property tax assessment. Whatever you use, keep the document: it is the number an examiner will ask about first.

The tax yearWhat depreciation does to a real return

Now a full year of running the house — 2027, its first complete calendar year. The purchase was financed with an 80% loan of $280,000 at 7.5% for 30 years; rent is $2,500 a month.

Two different numbers come out of the same year. In cash, after also paying about $2,680 of loan principal (which is not deductible), the owner is $4,194 out of pocket. On the tax return, the property shows an $11,696 loss. The gap is the depreciation: a deduction for money that was spent once, at purchase, and is being written off a slice at a time.

The limitWhen the loss actually cuts your tax bill

Rental losses are passive losses, and passive losses can normally only offset passive income. There is one exception that most individual landlords use: if you actively participate — you approve tenants, set the rent, approve repairs, even through a manager — you can deduct up to $25,000 of rental losses against your salary and other income.

That allowance shrinks by 50 cents for every dollar of modified adjusted gross income (MAGI) above $100,000 and is gone at $150,000. For our $11,696 loss:

At $90,000 or $120,000 of income, depreciation turns a $4,194 cash shortfall into a much smaller one after tax. At $160,000, it saves nothing this year — but the loss is not lost. It is suspended and carried forward, used against future rental profits, and released in full when you sell the property in a taxable sale. Married people filing separately who lived together during the year generally get no allowance at all.

The catchDepreciation recapture when you sell

Depreciation lowers your basis in the property every year. When you sell, the gain is measured from that lower basis — and the part of the gain created by depreciation is taxed at up to 25% (the IRS calls it unrecaptured section 1250 gain), not at the 15% long-term capital gains rate most landlords expect.

Keep the example house for ten years and sell in July 2036 for $460,000, paying 6% in selling costs:

Is that a bad deal? Usually not. You deducted that $101,818 over ten years at your ordinary rate, while the money was useful, and you repay at no more than 25% — often at a lower rate, because recaptured gain is taxed at your ordinary rate when that is below 25%. Your suspended losses are also released in the sale year. And recapture is deferred entirely by a 1031 exchange into another rental, or eliminated if the property passes to your heirs at a stepped-up basis.

The trap"I'll skip depreciation and avoid recapture"

This is the most expensive mistake on the list. The tax code taxes depreciation that was "allowed or allowable" — the amount you were entitled to take, whether or not you took it. Skip it for ten years and you still owe the recapture tax on $101,818 at sale, having received none of the deductions. At a 24% bracket, that is roughly $24,400 of tax savings simply given up.

If you have already missed years, it is fixable without amending every return: a change of accounting method on Form 3115 lets you catch up all the missed depreciation in the current year. It is worth having a tax professional prepare that one.

The acceleratorCost segregation and bonus depreciation

Not every part of a rental is a 27.5-year asset. Appliances, carpets and furniture are 5-year property; fences, driveways and landscaping are 15-year property. A cost segregation study — an engineering report that splits the purchase price into these classes — moves part of the building into shorter lives.

Those shorter-lived parts qualify for bonus depreciation, which the 2025 tax law (the One Big Beautiful Bill Act) made permanent at 100% for property acquired after January 19, 2025. If a study moved 20% of our building into 5- and 15-year classes, the first-year deduction would rise from $4,667 to about $59,700.

The recordsWhat to keep for depreciation

The line between a repair you deduct now and an improvement you depreciate is its own topic: our guide to tracking rental income and expenses for taxes covers the categories and the receipts behind each one.

Where these numbers come from

• Rules: IRS Publication 527 (Residential Rental Property) for the 27.5-year recovery period, basis, land exclusion and the placed-in-service rule; Publication 946 (How to Depreciate Property) for MACRS and the mid-month convention; Publication 925 (Passive Activity and At-Risk Rules) for the $25,000 active-participation allowance and its $100,000–$150,000 phase-out; Publication 544 and the Schedule D instructions for unrecaptured section 1250 gain at a maximum 25% rate and the "allowed or allowable" rule. Bonus depreciation at 100% for property acquired after January 19, 2025, per the One Big Beautiful Bill Act (Pub. L. 119-21).
• The property: $350,000 purchase, $70,000 land, closing costs ignored for simplicity (adding them raises the basis and the deduction slightly). Placed in service July 2026, sold July 2036 for $460,000 with 6% selling costs. Loan: $280,000, 7.5%, 30 years, interest for calendar 2027 from a monthly amortisation schedule. Rent $2,500 a month with 5% vacancy; expenses as shown.
• Tax rates: 22% and 24% federal brackets, 15% long-term capital gains rate, recapture at the 25% maximum. No state tax, no 3.8% net investment income tax, no suspended losses released at sale — each of those would change the totals for a real owner. Script: drafts/rental-depreciation-numbers.mjs.
• Not tax advice. The figures illustrate the mechanics; a real return depends on your filing status, other income and state.

FAQFrequently asked questions

How much depreciation can I take on a rental property?
Divide the building's cost — purchase price plus capitalised closing costs, minus land — by 27.5. A $280,000 building gives $10,182 a year, with a smaller amount in the first and last years.

Can I depreciate the land?
No. Land is not depreciable, so its value must be separated from the building's. Most landlords use the land-to-total ratio from their property tax assessment.

Do I have to take depreciation on a rental?
Effectively yes. When you sell, the IRS taxes the depreciation you were allowed to take, whether you claimed it or not, so skipping it costs you the deductions and saves you nothing.

What happens if I forgot to claim depreciation in past years?
You can usually claim all of the missed amount in the current year by filing Form 3115 for a change in accounting method, rather than amending each past return.

Can rental depreciation offset my W-2 income?
Up to $25,000 of rental losses can, if you actively participate and your modified AGI is under $100,000. The allowance phases out between $100,000 and $150,000; above that, losses carry forward until you have rental profits or sell.

What is depreciation recapture on a rental?
When you sell, the part of your gain that came from depreciation is taxed at your ordinary rate, capped at 25%, rather than at the lower long-term capital gains rate. A 1031 exchange defers it.

Put the number where you can see it

Depreciation is easy to set up once and forget, which is exactly why the running total gets lost before the sale that needs it. In the Rental Income Tracker, add the purchase price and land value to each property and the Taxes tab shows its full-year straight-line depreciation alongside your other deductions (trim the first and last years by the mid-month table above when you file). For the sale itself, the Capital Gains Calculator shows what your gain and rate look like before you list.