If you own rental property, you will hear the word "depreciation" constantly. It sounds complex, but the idea is simple: the IRS lets you deduct a portion of the building's cost each year. This guide explains depreciation in plain English and shows how it lowers taxes in 2026.
Summary Depreciation lets you deduct the cost of a rental building over time. For residential rentals, the IRS uses a 27.5-year schedule. You cannot depreciate land, only the building.
Table of Contents
- Quick Answer: What Is Depreciation?
- The BUILD Framework: Depreciation in One Model
- Why the IRS Allows Depreciation
- What You Can and Cannot Depreciate
- How Depreciation Is Calculated
- Allocating Land vs Building Value
- Residential vs Commercial Property
- Placed in Service: The Start Date That Matters
- Simple Depreciation Example
- Partial-Year Depreciation Example
- How Depreciation Lowers Taxes
- Depreciation and Home Improvements
- Cost Segregation (Brief Intro)
- Depreciation Recapture (Brief Intro)
- Recordkeeping Checklist for Depreciation
- Common Mistakes to Avoid
- FAQs
- Updated for 2026: What to Watch
- Change Log
Quick Answer: What Is Depreciation?
Depreciation is a tax rule that lets you deduct a portion of a property's cost each year as it "wears out." For real estate, the IRS assumes the building wears out over decades, so you spread the cost across a long schedule.
The BUILD Framework: Depreciation in One Model
Use BUILD to remember how depreciation works:
B = Building only, not land
U = Use as rental or business
I = IRS schedule applies
L = Life of asset determines annual deduction
D = Document cost basis
Why the IRS Allows Depreciation
The IRS treats rental property as a business asset that wears out over time. Depreciation accounts for the decline in value of the building, even if the market value goes up.
This is why you can deduct depreciation even in years when your property appreciates.
What You Can and Cannot Depreciate
You can depreciate:
- The building portion of your property
- Certain capital improvements (new roof, HVAC, additions)
- Equipment or appliances used in the rental
You cannot depreciate:
- Land
- Repairs and maintenance (deduct immediately instead)
- Personal-use portions of a property
If you buy a property for $400,000 and the land is valued at $100,000, only $300,000 is depreciable.
How Depreciation Is Calculated
For residential rental property, the IRS uses:
- 27.5-year straight-line depreciation
- Mid-month convention for start timing
That means you deduct roughly 1/27.5 of the building's basis each year, adjusted for the month the property was placed in service.
Allocating Land vs Building Value
You must separate the land value from the building value. Common ways to do this:
- Use the county assessor's land-to-building ratio
- Use an appraisal that splits land and improvements
- Use the allocation on closing documents if reasonable
The IRS expects a reasonable method. Over-allocating to the building increases depreciation and can trigger scrutiny.
Residential vs Commercial Property
- Residential rental property: 27.5 years
- Commercial property: 39 years
These are IRS schedules, not your accountant's choice.
Placed in Service: The Start Date That Matters
You begin depreciation when the property is placed in service, which means it is ready and available for rent, not necessarily when a tenant moves in.
Example:
You finish renovations and list the property on June 10. That is likely the placed-in-service date, even if you sign a tenant in July.
Simple Depreciation Example
Scenario:
You buy a rental property for $500,000. The land value is $120,000.
Building basis: $380,000
Annual depreciation: $380,000 / 27.5 = $13,818
That $13,818 reduces your taxable rental income each year.
Partial-Year Depreciation Example
Depreciation starts in the month the property is placed in service and uses the mid-month convention.
Scenario:
Placed in service on August 10. The IRS treats it as placed in service mid-August.
Annual depreciation: $13,818
Months in service: 4.5 months (mid-August through December)
Partial-year depreciation: $13,818 x (4.5 / 12) = $5,182
This prevents you from claiming a full year deduction in the first year.
How Depreciation Lowers Taxes
Depreciation is a non-cash expense, which means you can reduce taxable income without spending money that year.
Example impact:
If your rental shows $15,000 of profit before depreciation, a $13,818 depreciation deduction leaves only $1,182 of taxable income.
For more detail, see How Depreciation Lowers Taxes.
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Depreciation and Home Improvements
Capital improvements increase your basis and are depreciated separately. Each improvement starts its own depreciation schedule.
Examples of improvements:
- New roof
- Kitchen remodel
- Room addition
- New HVAC system
Repairs, on the other hand, are deducted immediately.
Cost Segregation (Brief Intro)
Cost segregation studies can reclassify parts of a property into shorter-lived assets, creating larger deductions earlier. This can be valuable for high-income investors, but it adds complexity and cost. If you are considering cost segregation, review it with a tax professional and confirm that the benefits outweigh the fees.
Depreciation Recapture (Brief Intro)
When you sell a rental, the IRS may "recapture" depreciation by taxing it at a special rate. That means depreciation saves taxes now but can increase taxes later if you sell.
For the full breakdown, see Depreciation Recapture Explained.
Recordkeeping Checklist for Depreciation
Keep a clean paper trail so you can support the deduction and calculate recapture later:
- Closing statement showing purchase price
- Land vs building allocation support
- Improvement invoices and receipts
- Depreciation schedules by year
- Placed-in-service date evidence (listing, lease, or readiness)
These records should be kept until you sell the property, not just for three years. Digital copies are fine.
Common Mistakes to Avoid
- Depreciating land value
- Forgetting to start depreciation when placed in service
- Misclassifying repairs as improvements
- Failing to track improvement costs
- Not claiming depreciation at all (the IRS treats it as claimed anyway)
FAQs
Do I have to take depreciation?
Yes. The IRS treats depreciation as taken even if you do not claim it, which can hurt you when you sell.
Can I depreciate a primary residence?
No, not unless part of the home is used as a rental or business.
What if my property is vacant?
You can still depreciate it if it is available for rent.
Updated for 2026: What to Watch
For 2026, watch for:
- IRS updates to depreciation schedules or conventions
- Changes to bonus depreciation for qualifying property
- State-level differences in depreciation rules
Change Log
- 2026-02-13: Initial 2026 edition with BUILD framework and examples.
Sources: IRS Publication 527, IRS MACRS guidance, Schedule E instructions.
