Depreciation is one of the biggest tax benefits for landlords, but claiming it correctly requires a clear understanding of how it works. While the rules may seem complicated at first, landlords can start using this deduction with the right calculations and knowledge. Start claiming this major deduction and see how depreciations fits into your financial picture and filing your taxes as a landlord.
Key Takeaways
- Depreciation is a tax deduction that lets landlords spread out the cost of buying and improving a rental property over time, rather than deducting it all at once.
- Landlords can recover rental property costs through depreciation, but only the building — not the land — qualifies, and most residential rentals use the 27.5-year straight line depreciation method under MACRS.
- Calculating depreciation hinges on adjusted basis, recovery period, and method: landlords typically divide the property’s basis over 27.5 years and apply the mid-month convention or use IRS MACRS tables for precise annual deductions.
What Is Depreciation?
Depreciation helps landlords recover the costs of buying and improving a rental property over time through annual tax deductions. It’s about allocating the cost of the property over its life, not assessing the value of it.
In the first year you place a rental in service, you usually submit Form 4562, Depreciation and Amortization. For each subsequent year, you report depreciation on Schedule E, but don’t have to submit Form 4562 again unless required. Keep records of your depreciation calculations as accurate documentation is essential for tax reporting.
What requirements need to be met to depreciate property?
To take a deduction for a depreciation on a rental property, the property must meet this specific criterion, according to the IRS:
- You must own the property, not be renting or borrowing it
- You must be using the property to produce income
- You must be able to determine the “useful life” of the property, meaning the property should become eventually worn out, decay, etc.
- The property’s useful life should be longer than one year
If you meet all of the criteria above, you can claim depreciation on your rental property.
What can’t be depreciated
Land is not depreciable, but it still gets its own tax basis. When you buy a rental property, you must split the total purchase price between land and building. Only the building portion is depreciated. The land portion is kept in your records because it remains part of your overall basis in the property and matters when you calculate gain or loss on a future sale.
The Start and End of Depreciation
You can begin depreciating a rental when it is “placed in service.” Basically this means the property is ready to rent, regardless if you have a tenant or not. For example, if you start renovations in April and they finish in June, that’s when the house is ready to be rented. Depreciation begins in June as that is when the property is placed in service, even if you don’t find a tenant until August.
Depreciation ends when the property’s cost is fully recovered or when the property is permanently removed from rental service. A temporary vacancy does not usually stop depreciation.
Factors Affecting Depreciation
Depreciation is not as simple as just deducting payments and costs. There are factors that you must include in your calculations that affect depreciation:
- Your basis in the property
- The recovery period for the property
- The depreciation method used
Basis of Depreciable Property
The basis of property is the adjusted basis when the rental is placed in service. In most cases, that is the cost when you acquired the rental, with adjustments for certain items. If you depreciate the property under the Modified Accelerated Cost Recovery System (MACRS), then you may have to reduce your basis by certain deductions and credits. So, landlords will start with the property’s cost basis and then adjust it to determine the amount that can be depreciated.
How to find cost basis
The cost basis is the amount you paid to purchase the rental, plus certain purchase-related costs that can be added to the basis. For real estate, that can include real estate taxes, legal fees, transfer taxes, title insurance, etc.
If you buy property and assume a mortgage, your basis is the amount you paid for the property plus the remaining mortgage. You also need to separate the cost of land and buildings; your depreciable basis won’t include the land. Your overall basis can include the land, but land is not depreciable, so you must allocate total cost between land and building to determine the depreciable basis of the building.
How to adjust your basis
To figure out your property’s adjusted basis you have to make certain increases and decreases.
Increase to basis:
- The cost of additions or improvements made before the property is placed in service as a rental, if they have a useful life of more than one year, including materials, labor, and preparation costs.
- Amounts spent to restore the property after a casualty.
- The cost of extending utility service lines to the property.
- Legal fees for defending or perfecting title, or for resolving zoning issues.
Decrease to basis:
- Insurance proceeds or other reimbursements received for a casualty or theft loss.
- Casualty losses not covered by insurance that you deducted.
- Payments received for granting an easement.
- Any special depreciation allowance or Section 179 deduction claimed on qualified property.
- Depreciation deducted, or that could have been deducted, on the property.
Unadjusted basis
The unadjusted basis is the cost basis but without reducing or adjusting it by any MACRS deprecation taken in earlier years. You still have to adjust your basis, but you will exclude prior MACRS depreciation.
Depreciation Systems Under MACRS
The Modified Accelerated Cost Recovery System (MACRS) is used to depreciate your rental, and it has two systems that determine the process. These are the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Usually, you’ll use GDS unless you choose to use ADS or the law requires you to.
For either nonresidential or residential rental properties, you can choose either system on a property-by-property basis. But once you select a system, you must stick with it for as long as you claim depreciation. We’ll go more in depth into GDS as that is the most common method, but here are the main differences between the two.
Alternative Depreciation System:
- Useful life for residential properties is 30 years or 40 years if the property was placed in service before January 1st, 2018
- Longer recovery periods
- Smaller amounts of depreciation that can be claimed each year
General Depreciation System (GDS):
- Useful life for residential properties is 27.5 years
- Shorter recovery period
General Depreciation System (GDS)
GDS is the main method that most landlords will use to depreciate their rental property. It is the one that is automatically applied unless you choose to (or must use) ADS.
GDS property classes
GDS has nine property classifications that affect how depreciation of the item works. Rentals are considered residential rental property, but any additions or improvements are separate property items that need to be depreciated separately.
Recovery period
The recovery period is the number of years in which you recover the property’s price and other basis. For GDS, the recovery period is defined by its property class. The recovery period for residential rental property is 27.5 years under GDS as of 2025, but check the IRS website to confirm.
Conventions
The convention dictates when the recovery period starts and ends. So, it determines how many months you can claim depreciation when a property is placed in service or retired. Rental properties use the mid-month convention, meaning that all property is treated as being placed in service or retired at the midpoint of the month.
How to Calculate Depreciation on Rental Property
There are two main ways to calculate annual deprecation for rentals. The first is to calculate depreciation yourself using the appropriate depreciation method and convention; the second is to use the MACRS percentage tables published by the IRS.
For using the percentage tables to calculate depreciation, find the current numbers in Publication 527 and 946 written by the IRS. If you are calculating the depreciation, then residential rental property requires using the mid-month convention and straight line method.
Straight line depreciation
The straight line method is when landlords recover the cost of a rental property in equal amounts over its recovery period. For GDS, that means you will use the straight line method over 27.5 years, with the mid-month convention. In the years the rental is placed in service and retired, the deduction is a partial-year amount. In years after that, the annual depreciation will remain the same, unless the property’s basis changes.
You’ll also need to know the straight line rate (aka depreciation rate), which can be calculated by dividing the number one by the years remaining in the recovery period. For example, to find the straight line rate for a property with 10 years left in the recovery period, you would divide one by 10. So, that would be .10 or 10 percent.
How to calculate rental property depreciation
To figure out depreciation for the year your rental is placed in service:
- Multiply your adjusted basis in the property by the straight line rate
- Apply the applicable convention
For all other years:
- Start with your property’s basis, then subtract the depreciation you already claimed, or were entitled to claim, in prior years
- Determine the depreciation rate (straight line rate) for the year
- Multiply the adjusted basis by the depreciation rate
Example of rental property depreciation with GDS
You bought a rental home for $200,000 and placed it in service on March 25 with a recovery period of 27.5 years. The adjusted basis of the building is $200,000. Here are the calculations for the first and second year.
First year:
- Figure out depreciation rate: 1 ÷ 27.5 = .03636 (3.636%)
- Depreciation for the year: $200,000 × .03636 = $7,272
- Mid-month convention: March 25 so you get 9.5 months
- Find month fraction: 9.5 ÷ 12 = .7916
- First year depreciation: $7,272 × 0.7916 = $5,756.52
Second year:
- Find adjusted basis: $200,000 - $5,756.52 = $194,243.48
- Find years left: 27.5 years (330 months) – 9.5 months = 26.7083 years (320.5 months)
- Find straight line rate: 1 ÷ 26.7083 = .0374
- Find depreciation: $194,243.48 × .037 = $7,187.01
Using MACRS Percentage Tables
To calculate depreciation using the MACRS percentage tables, you will take the rate for the applicable year and apply to your property’s unadjusted basis. Use the row for the month the property was placed in service to find the percentage for your depreciation deduction. Because the table already reflects the mid-month convention, you should continue using that same row in later years and apply the percentage shown for each corresponding year.
However, you cannot change the method by which you choose to calculate your depreciation. If you use MACRS percentage tables, then you will have to continue to use this method. The only exceptions are when the property’s basis is adjusted for a reason other than allowed or allowable depreciation, or when you make an addition or improvement that must be depreciated separately.
2025 MACRS GDS percentage table for residential rental property (27.5-year s/l with mid-month convention)
Use the row for the month of the taxable year placed in service.
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
|
January |
3.485% |
3.636% |
3.636% |
3.636% |
3.636% |
3.636% |
|
February |
3.182% |
3.636% |
3.636% |
3.636% |
3.636% |
3.636% |
|
March |
2.879% |
3.636% |
3.636% |
3.636% |
3.636% |
3.636% |
|
April |
2.576% |
3.636% |
3.636% |
3.636% |
3.636% |
3.636% |
|
May |
2.273% |
3.636% |
3.636% |
3.636% |
3.636% |
3.636% |
|
June |
1.970% |
3.636% |
3.636% |
3.636% |
3.636% |
3.636% |
|
July |
1.667% |
3.636% |
3.636% |
3.636% |
3.636% |
3.636% |
|
August |
1.364% |
3.636% |
3.636% |
3.636% |
3.636% |
3.636% |
|
September |
1.061% |
3.636% |
3.636% |
3.636% |
3.636% |
3.636% |
|
October |
0.758% |
3.636% |
3.636% |
3.636% |
3.636% |
3.636% |
|
November |
0.455% |
3.636% |
3.636% |
3.636% |
3.636% |
3.636% |
|
December |
0.152% |
3.636% |
3.636% |
3.636% |
3.636% |
3.636% |
For the full table go to Appendix A in Publication 946 to Table A-6.
Example of depreciation calculation using MACRS GDS percentage tables
You bought a rental home for $200,000 and placed it in service on March 18. The building cost $180,000 and the land cost $20,000. So, your basis is $180,000. From the table, you find the depreciation percentage for March of year 1, which is 2.879 percent. To calculate you would multiply $180,000 by 2.879 percent (.02879) which means that year’s depreciation deduction is $5,182.2.
When You Should Hire a Tax Professional
Depreciation can create substantial tax savings for rental property owners, but the rules are detailed and mistakes can be costly. If you want to claim depreciation correctly, stay compliant, and account for major events such as improvements or a future sale, it is often worth working with a qualified tax professional. A tax advisor can help you apply the rules properly, report depreciation accurately, and avoid issues that may affect your deductions or trigger complications later.
Keep Tax Records in One Place with Apartments.com
Taxes require a lot of gathering records and information, which is why keeping it in one place can simplify the task. To make it easy, list on Apartments.com so you can track your expenses and income as well as get a 1099-K form. Keep your records organized throughout the year so tax filing is a breeze.
The above information is in no way intended to be a substitute for qualified legal advice. Please conduct your own research and comply with all your state and local laws. If you need tax advice, please contact a tax professional or real estate lawyer in your area.
FAQs
Can I correct depreciation?
If you need to correct depreciation, you may be able to do so by filing Form 1040-X, Amended U.S. Individual Income Tax Return. If you can’t do that, you might be able to change your accounting method to claim the proper amount.
How long does depreciation last?
Depreciation does not last forever. Depreciation typically ends when the entire cost basis has been recovered or after the applicable recovery period. The recovery period depends on the system and for GDS it is 27.5 years. It can also end when the property is retired from service, whether by sale or conversion. Temporary vacancies don’t end depreciation as long as the property is available for rent.
How do I report my rental property depreciation to the IRS?
Rental property depreciation is generally reported on Schedule E (Form 1040). In some situations, you may also need Form 4562, such as when you first place property in service or claim depreciation for certain assets. If you have any concerns about which tax form is right for you and your rental property, speak with a tax or financial advisor.
What happens to depreciation when you sell a rental property?
Depreciation ends when you sell the property, even if you haven’t fully recovered its costs.
Does depreciation affect land?
No, only the value of the building can be depreciated; you cannot depreciate land. This is because according to the IRS land cannot be "used up" or “worn out.”
This article was originally published on November 21, 2022 by Helen Ann Wells.
