What is the depreciable basis for rental property?

If you bought the property as a rental, your depreciable basis is your cost (purchase price plus capitalized closing costs) allocated to the building. Land is excluded. Later capital improvements are depreciated separately. If you convert your former home or other personal-use property to a rental, the building's basis for depreciation is the lower of its adjusted basis or its fair market value on the conversion date (IRS Pub. 527), and it is placed in service when it becomes available for rent.

Can I depreciate a rental property that appreciated in value?

Yes, depreciation is based on your original cost basis, not current market value (a former home converted to a rental uses the lower of its adjusted basis or fair market value on the conversion date). You must claim depreciation or lose the tax benefit when you sell.

What happens to depreciation when I sell the property?

The depreciation you took (or could have taken) is taxed as 'unrecaptured Section 1250 gain' at your ordinary rate, capped at 25%. It can never exceed your gain on the sale. If your gain is smaller than your depreciation, only the gain is taxed this way, and a sale at a loss has none. Gain above the depreciation is taxed as a long-term capital gain. This assumes you held the property more than a year and have no other section 1231 losses this year and no unrecaptured net section 1231 losses from the prior five years; those can make part of the gain ordinary income (Form 4797; IRS Pub. 544).

Rental Property

Rental Property Depreciation Guide 2025

Master MACRS depreciation rules and maximize your tax deductions as a landlord

Updated August 24, 2026Reviewed for 2025 & 2026 tax yearsIRS-sourcedReviewed by Adam Khale

This guide explains exactly how MACRS depreciation works for residential and commercial rental property. The recovery periods, conventions, and math come straight from Publication 946 and Publication 527, and are re-verified each tax year.

$8,727

average annual depreciation deduction per $300K property

About Our Editorial Process

How do I calculate rental property depreciation?

Residential rental property in the U.S. is depreciated over 27.5 years using the straight-line method (GDS). Calculate your annual deduction by subtracting land value from purchase price, then dividing by 27.5. For a $300,000 property with 20% land ($60,000), the annual depreciation is $8,727. A former home converted to a rental starts from the lower of its adjusted basis or fair market value on the conversion date.

•27.5 years for residential, 39 years for commercial (GDS); a residential rental outside the U.S. placed in service after 2017 uses 30 years (ADS; 40 if placed in service before 2018), and nonresidential uses 40
•Land is not depreciable—only the building
•Add capital improvements separately with their own schedules
•Claim it: your basis drops by the depreciation allowed or allowable, whether or not you claim it

Calculate Your Depreciation

Depreciation is the single most powerful — and most misunderstood — tool in rental property tax. It turns a profitable property into a paper-loss one for tax purposes while you still collect the rent. Skip it and your basis still drops by the depreciation you could have taken ('allowed or allowable'), so the gain at sale is no smaller. There is no upside to not claiming it.

Real-world scenario

$425K duplex, $85K land, 2025 placed in service

Building basis: $340K. Annual straight-line depreciation: $340K / 27.5 = $12,364. With a $7,200/yr cash flow before depreciation, the property shows a $5,164 paper loss on Schedule E — usable against passive income or carried forward. Without depreciation, that $7,200 would be fully taxable at the owner's marginal rate.

The part most people miss

Cost segregation studies (typically $3K-$15K) reclassify 15-25% of the building basis into 5- and 15-year property eligible for 100% bonus depreciation under §168(k), restored permanently by OBBBA §70301 for qualifying property acquired after January 19, 2025 (a building bought earlier keeps the old phase-down: 40% if placed in service in 2025, 20% in 2026). For properties over $300K, the year-one tax savings usually exceed the study cost by 3-5x — but only if you can actually use the loss (passive activity rules apply).

Depreciation at a Glance

27.5

Years for Residential (GDS)

Years for Commercial (GDS)

3.636%

Annual Rate (Residential, GDS)

What is Depreciation?

Depreciation is a tax deduction that allows you to recover the cost of your rental property over its "useful life." The IRS considers buildings to wear out over time, so you can deduct a portion of the building's value each year—even if the property is actually appreciating in market value.

Why Depreciation is Powerful

Paper loss: Reduces taxable income without any cash outflow
Creates cash flow: You can have positive cash flow but show a loss on taxes
Required: Your basis drops by the depreciation allowed or allowable whether or not you claim it, so skipping it only costs you the deduction

Calculating Your Depreciable Basis

You can only depreciate the building, not the land. If you bought the property as a rental, your depreciable basis is your total cost (price plus capitalized closing costs) times the building's share of value:

Depreciable Basis — worked example

Purchase price$300,000

+ Closing costs (capitalized)+$5,000

= Total cost$305,000

− Land share (20% by FMV or assessed-value ratio)−$61,000

= Building basis$244,000

Annual deduction ($244,000 ÷ 27.5 years)$8,873

Leave the closing costs out and you get the simplified $8,727/year figure quoted elsewhere on this page. Capitalizing them adds about $145 a year.

Renting out your former home?

When you convert your home (or other personal-use property) to a rental, the building's basis for depreciation is the lower of its adjusted basis or its fair market value on the conversion date (IRS Pub. 527), and it is placed in service when it is ready and available for rent. Pub. 527's example: the house's adjusted basis is $164,000 and its fair market value at conversion is $147,000 (land excluded), so the basis for depreciation is $147,000. Available for rent in August, Year 1 depreciation is $147,000 × 1.364% = $2,005.

Determining Land Value

Allocate cost by the land and building's relative fair market values:

Property tax assessment: If you aren't certain of the fair market values, use the land-to-total ratio from your county assessor
Appraisal: Get a professional appraisal allocating land vs building

Land share varies widely by market (it can exceed 50% in high-cost areas); don't use a national average.

Closing Costs You Can Add to Basis

Title insurance, legal fees, recording fees, transfer taxes, and survey costs can be added to your basis and depreciated. Loan-related costs (points, origination fees) are amortized separately over the loan term.

MACRS Depreciation Method

The Modified Accelerated Cost Recovery System (MACRS) is the depreciation method required for rental real estate. Under its General Depreciation System (GDS), which covers most U.S. rentals, residential rental property uses straight-line depreciation over 27.5 years and commercial property over 39 years. Some property must use the Alternative Depreciation System (ADS) instead: 30 years for residential rental property placed in service after 2017 and 40 years for nonresidential. The main cases are a rental located outside the United States, and property of a real-estate business that elected out of the §163(j) business-interest limit.

Property Type	Recovery Period	Annual Rate
Residential rental (27.5-year, GDS)	27.5 years	3.636%
Commercial property (39-year, GDS)	39 years	2.564%
Foreign rental / electing real property business (ADS)	Residential 30 yrs (placed in service after 2017; 40 before 2018*), nonresidential 40 yrs	3.333% (2.5% pre-2018) / 2.5%
Appliances, carpet (5-year)	5 years	Accelerated
Land improvements (15-year)	15 years	Accelerated

*An electing real property business may use 30 years for pre-2018 residential property that wasn't already on ADS (Pub. 946).

Mid-Month Convention

Real estate depreciation uses the "mid-month convention," meaning the property is treated as placed in service in the middle of the month, regardless of the actual date.

Example: If the property is ready and available for rent on June 3 or June 28, you get the same Year 1 depreciation: 6.5 months (mid-June through December). The clock starts when the property is placed in service, meaning ready and available for rent, not at closing. Buy on June 3 but finish repairs and list it on July 5, and Year 1 starts in July (5.5 months).

First Year Depreciation by Month

The month you place the property in service determines your first-year depreciation percentage.

Month Placed in Service	Year 1 %	Per $100K Basis
January	3.485%	$3,485
February	3.182%	$3,182
March	2.879%	$2,879
June	1.970%	$1,970
December	0.152%	$152

Tax Planning Tip

Depreciation starts in the month the property is ready and available for rent. A December start gets only ~$152 per $100K that year, then the full ~$3,636 a year after. Waiting until January does not give you more depreciation; it just starts the whole schedule later. Don't delay closing or listing for depreciation reasons.

Depreciating Capital Improvements

Capital improvements add value, prolong the life, or adapt the property to new uses. These must be depreciated separately from the original building.

Each improvement is its own asset with its own placed-in-service date: its schedule starts in the month it is placed in service (mid-month convention), and it is not added to the building's original basis back to year one. Example: a $27,500 roof placed in service in June 2026 on a rental placed in service in 2020 adds about $542 for 2026 ($27,500 ÷ 27.5 × 6.5/12) and about $1,000 a year after that; the 2020–2025 depreciation on the building does not change.