How to Calculate Depreciation on a Rental Property (Step by Step)

Depreciation is the largest deduction most landlords either fumble or skip, and it is the one the IRS cares about whether you take it or not. If you want to calculate depreciation on a rental property correctly, the math itself is short: it is four inputs and a division. The part that trips people up is what goes into those inputs, and what the deduction quietly does to your tax bill years later when you sell.

Here is the whole thing, in the order you actually do it, with a worked example you can follow line by line.

What depreciation is, and why it is not optional

Depreciation is the IRS letting you write off the cost of the building over its "useful life" because it wears out. You did not spend that cash this year, so it is a paper deduction: it lowers your taxable rental income without touching your bank account. On a typical single-family rental it is often the difference between a Schedule E that shows a profit and one that shows a paper loss, which is the core reason landlords can pay little or no tax on rental income for years at a time.

The catch most guides bury: it is not really a choice. When you sell, the IRS computes recapture on the depreciation you were allowed to take, not the amount you actually claimed. Skip it and you still pay the recapture later, you just gave up the deduction now. So the right move is always to claim it, every year, correctly. We will get to that bill at the end.

Step 1: Start with your cost basis

Your basis is what you paid for the property, plus the closing costs the IRS makes you capitalize rather than deduct: title insurance, recording fees, legal fees, transfer taxes, and survey costs. It is the purchase price plus those items, not your loan amount and not your down payment.

What is not in basis: loan points, prepaid interest, and prepaid insurance or property tax in escrow. Those are their own deductions. Get this number right once, because every year of depreciation flows from it.

Step 2: Split the land out, because land never depreciates

Only the building wears out. Land does not, so it never depreciates, and your first real task is carving the land value out of that basis. Three common ways to do it:

• The tax assessor's ratio. Your assessment splits value into land and improvements. Apply that same percentage to your purchase price. This is the most common method and the one the IRS accepts most readily.
• An appraisal. More defensible if your split is unusual, but it costs money.
• A reasonable allocation documented at purchase, if neither of the above fits.

Whatever you use, write down why. An aggressive land split (say, calling 5% of a property land to maximize the building) is a classic audit flag. If the assessor says land is one-sixth of value, that one-sixth is the safe number.

Step 3: Divide the building by 27.5

Residential rental property uses the General Depreciation System: a 27.5-year recovery period, straight-line. Straight-line means the same deduction every full year, not front-loaded. So the formula is simply:

Annual depreciation = (purchase price minus land) ÷ 27.5

Worked example. You buy a single-family rental for $300,000. The assessor splits it one-sixth land, five-sixths building, so land is $50,000 and your depreciable basis is $250,000.

$250,000 ÷ 27.5 = $9,091 per full year

That is the number you deduct on Schedule E line 18 every year, for 27.5 years, until the basis is used up or you sell. The free rental property depreciation calculator runs this and prints the full schedule, but the arithmetic is exactly what you see here. To keep the record year over year, the depreciation schedule template tracks each asset on its own row with running totals. One boundary case: the 27.5-year clock is US-only, a foreign rental depreciates over 30 years on the ADS schedule.

The mid-month convention makes year one (and the last year) partial

You almost never place a property in service on January 1, so the IRS uses the mid-month convention: it pretends you started in the middle of whatever month the property was ready and available to rent, regardless of the actual day.

Say our $300,000 rental went on the market in June. The IRS treats it as in service on June 15, which leaves 6.5 months in year one:

$9,091 × (6.5 ÷ 12) = $4,924 in year one

Then you take the full $9,091 in each year after, with a matching stub at the very end. Here is the start of the schedule:

Year	Depreciation	Accumulated
1 (June start)	$4,924	$4,924
2	$9,091	$14,015
3	$9,091	$23,106
…	…	…
28 (stub)	$8,710	$250,000

"Placed in service" means ready and available to rent, not the day a tenant moves in or the day you closed. A property sitting vacant but listed and rent-ready is in service. One still being renovated is not.

Capital improvements get their own 27.5-year clock

A new roof, an HVAC system, an addition, or a gut remodel is not a repair you deduct this year. It is a capital improvement with its own basis and its own 27.5-year schedule, starting the month it is placed in service. So a property that has been depreciating for six years can easily have three or four separate depreciation schedules running at once.

This is exactly where landlords lose track, because it means depreciation is not one number you set and forget, it is a small stack of schedules you maintain. The line between a deductible repair and a depreciable improvement is its own decision, and we walk it in how to categorize rental expenses for Schedule E.

What you can and cannot depreciate

Not everything rides the 27.5-year track:

• 27.5 years: the building and most capital improvements.
• Faster MACRS classes (5 to 7 years): appliances, carpet, and furniture. 15 years: land improvements like fences, driveways, and landscaping. Pulling these out of the building to depreciate them faster is the heart of a cost-segregation study, which our basic calculator does not model. The asset-by-asset clocks, including the surprises (a roof is 27.5 years no matter how long it lasts, carpet is 5), are tabled in how long you depreciate every rental asset.
• Never: the land itself, and your own labor.

For the official class lives, IRS Publication 946 is the reference, and Publication 527 covers residential rental property specifically.

The bill nobody mentions: depreciation recapture

Here is the part that makes depreciation a timing strategy rather than free money. Every dollar you depreciate lowers your cost basis. So when you sell, your taxable gain is larger by exactly the depreciation you took, and that slice is taxed as unrecaptured Section 1250 gain at up to 25%, separate from the capital-gains rate on the appreciation.

That is why the accumulated column in the schedule above matters: it is the number that comes back at sale. On our example, after ten years you would have claimed roughly $87,000 of depreciation, and that $87,000 is recapture-exposed when you sell. The full exit-side math, including the trap where you owe recapture on depreciation you never claimed, is in depreciation recapture on rental property, calculated.

Two things soften it. A 1031 exchange defers both the recapture and the capital gain if you roll into a like-kind property. And if you have suspended passive losses sitting on the property, a sale releases them, often offsetting a chunk of the bill. These are the same levers in the full playbook on how to avoid capital gains tax on a rental property, and the interaction is large enough that it is worth modeling before you list, which is what the sell vs. hold vs. 1031 calculator is for.

How to claim it, and keep it

Mechanically, depreciation flows from Form 4562 (where you list each asset and its schedule) onto Schedule E line 18 each year. See About Form 4562 for the form itself.

The harder part is not the form, it is keeping the schedules straight across years and across improvements, because the IRS expects you to carry the same numbers forward consistently and to have recapture ready at sale. This is the same reason reconciled, complete books matter: a depreciation schedule is only as good as the basis records behind it.

The takeaway

Calculating depreciation is four inputs and a division: purchase price, land value, placed-in-service month, and any improvements on their own clocks. The discipline is claiming it every year (because recapture comes for it whether you do or not) and keeping the schedule clean so the number is right at sale. If you want to see what the deduction is worth in dollars saved, by property value, bracket, and land share, we published the full data tables computed with the same engine.

Run your own numbers in the rental property depreciation calculator, it is free and gives you the full year-by-year schedule. And if you would rather not hand-track basis and improvements across properties, that is the kind of thing the Oberlin24 AI handles in the background. None of this is tax advice, so confirm the specifics with your CPA, but at least now you know what they are working with.