Depreciation is the deduction that makes rental property tax-efficient: a paper expense that reduces taxable income without any cash leaving your account. It is also the deduction investors understand least well, largely because of what happens at the other end when the property sells. This page is general information rather than tax advice — the specifics turn on your own facts and belong with a CPA.
How the schedule works
Residential rental property is depreciated over 27.5 years on a straight-line basis; commercial property over 39. Only the building depreciates — land does not, because it does not wear out. Allocation between the two typically follows the assessor’s ratio or an appraisal. On a $400,000 purchase with $80,000 allocated to land, the $320,000 building yields roughly $11,636 of annual depreciation.
What it does to taxable income
That $11,636 is subtracted from rental income as an expense even though no money moved. A property producing $16,000 of cash flow might show $4,400 of taxable income after depreciation, or a paper loss on a more leveraged deal. Whether a passive loss can offset other income depends on passive activity rules, income level and whether you qualify as a real estate professional — rules complex enough that guessing is expensive.
Recapture: the part people forget
When you sell, depreciation taken (or that you were entitled to take, whether or not you claimed it) is recaptured and taxed — unrecaptured Section 1250 gain, at rates up to 25%, rather than at long-term capital gains rates. The phrase "or were entitled to take" matters: skipping the deduction does not avoid the recapture. It is the single most common unpleasant surprise at closing for investors who held a property a long time.
Accelerating it with cost segregation
A cost segregation study reclassifies components of the building — fixtures, appliances, flooring, site improvements — into 5, 7 and 15-year lives, pulling deductions forward into the early years of ownership. It costs money to commission and only makes sense above a certain property value, but it can move six figures of deduction into the first year on the right asset.
Depreciation and financing decisions
Two practical connections. First, a 1031 exchange defers recapture along with capital gain, which is a significant part of why long-term holders exchange rather than sell. Second, depreciation does not affect loan qualification on a DSCR product at all — those underwrite gross rent against the payment, not tax returns. That is precisely why DSCR lending suits investors whose returns look thin on paper after depreciation but whose properties cover their payments comfortably.
Rental Property Depreciation FAQ
27.5 years, straight-line. Commercial property uses 39 years.
No. Only improvements depreciate. The purchase price must be allocated between land and building, commonly using the assessor’s ratio.
Recapture still applies on what you were entitled to take. There are procedures for correcting missed depreciation — a question for your CPA, and worth raising well before a sale.
When the property is placed in service — available and ready to rent — not necessarily when you bought it or when a tenant moved in.
On conventional loans it factors into how income is calculated from tax returns. On DSCR loans it is irrelevant, because qualification runs on the property’s rent rather than your returns.
Recapture is deferred along with the capital gain, and the deferred amounts carry into the replacement property’s basis.