Real Estate Tax Calc
Step 1: Find the building basis
Subtract the land value from your purchase price. Only the building depreciates — land does not wear out, so it's never depreciable.
Step 2: Pick the recovery period
Residential rental property uses a 27.5-year straight-line schedule; commercial property uses 39 years.
Step 3: Divide
Annual depreciation = building basis ÷ recovery period. Example: a $300,000 residential rental with $60,000 land has a $240,000 building basis; $240,000 ÷ 27.5 = about $8,727 per year.
What actually goes into your depreciable basis
The three-step formula is right, but the number you plug in as 'building basis' is where most errors happen. Your starting basis is more than the price on the contract. Begin with the purchase price, then add most acquisition closing costs — title insurance, recording and transfer fees, survey costs, owner's legal fees, and any back property taxes you agreed to pay for the seller. Those costs become part of what you recover over 27.5 years.
Some costs are deliberately excluded. Loan costs — points, the lender's appraisal, credit report and origination fees — are not added to basis; they are amortized separately over the life of the mortgage. Prorated property taxes and prepaid insurance are current deductions, not basis. And of course you subtract the land value before dividing, because land never depreciates. Getting this starting number right matters twice: it drives every year of deduction, and it drives the depreciation recapture you will owe when you sell.
Apply the mid-month convention in the first year
Residential rental real estate uses the mid-month convention under MACRS, so your first year is almost never a full year. The IRS treats the property as placed in service in the middle of whatever month it first became ready and available to rent. In our $240,000 example, a property placed in service in April is treated as in service for 8.5 of the 12 months. The first-year deduction is roughly $240,000 × (8.5 ÷ 12) ÷ 27.5 ≈ $6,182, not the full $8,727.
You do not have to do that arithmetic by hand. IRS Publication 946 and the Form 4562 instructions provide MACRS percentage tables that already bake in the convention. For 27.5-year residential property placed in service in April, the first-year factor is 2.576%: $240,000 × 2.576% = $6,182. Each month has its own factor, so the month you place the property in service directly changes your first-year write-off.
Years two through the final year
From the second full year onward, the tables settle into a steady 3.636% per year, which is our $8,727. You keep taking that amount until the basis is fully recovered. Because the first year was partial, the schedule actually runs slightly beyond 27.5 calendar years — the last small piece of basis comes off in year 29. Commercial (nonresidential) property works the same way but over 39 years, a 2.564% annual factor.
One rule catches people who try to be clever: you cannot skip a year to 'save' the deduction. The IRS reduces your basis by the depreciation allowed or allowable — meaning if you were entitled to it and did not claim it, your basis still drops and you still owe recapture at sale, but you never got the deduction. So take it every single year. If you missed years in the past, Form 3115 lets you claim the catch-up all at once.
Improvements and short-life assets depreciate on their own schedules
Not everything follows the 27.5-year clock. When you spend money to improve the property after it is in service — a new roof, an addition, a full kitchen remodel — that cost becomes a separate depreciable asset with its own placed-in-service date, generally recovered over 27.5 years for structural work. Shorter-lived items have shorter recovery periods: appliances, carpeting, and furniture are 5-year property; land improvements such as fences, driveways, and landscaping are 15-year property.
Draw a clear line between an improvement and a repair. A repair keeps the property in ordinary working condition — patching a leak, repainting, replacing a broken window — and is deducted in full the year you pay it. An improvement betters, restores, or adapts the property and must be capitalized and depreciated. The tangible property regulations, along with safe harbors like the de minimis and small-taxpayer safe harbors, help you decide which bucket a cost falls into.
Worked example: a full first three years
Suppose you buy a residential rental on June 10 for $330,000, pay $8,000 in qualifying closing costs, and the county assessor allocates 25% of value to land. Your total basis is $338,000; land is $84,500; the depreciable building basis is $253,500.
Placed in service in June, the first-year MACRS factor is 1.970%, so year one is $253,500 × 1.970% = $4,994. Year two and every full year after is $253,500 × 3.636% = $9,217. If you also spent $6,000 on new appliances (5-year property) placed in service the same June, those add roughly $1,200 of first-year depreciation on top (before any bonus depreciation). This is exactly the kind of layered schedule the rental property depreciation calculator builds for you automatically.
Accelerating deductions with cost segregation and bonus depreciation
Rather than depreciate the whole building over 27.5 years, a cost segregation study engineers a breakdown of the purchase into its components and reclassifies the 5-, 7-, and 15-year assets out of the 27.5-year shell. Those shorter-life components qualify for bonus depreciation — which, following the One Big Beautiful Bill Act, is back to 100% for qualifying property acquired and placed in service after January 19, 2025. On a typical residential rental, 15%–30% of the building basis can often be reclassified, pulling a large deduction into year one.
Two limits keep this honest. The building shell itself (27.5 or 39 years) never qualifies for bonus depreciation regardless of the rate. And the passive activity loss rules govern who can actually use the resulting loss against other income — most passive investors carry it forward, while a Real Estate Professional or a qualifying short-term rental host may use it currently. Model the after-tax effect before paying for a study.
Depreciation is recaptured when you sell
Depreciation is a deferral, not a permanent giveaway. Each dollar you deduct lowers your adjusted basis, which increases your taxable gain when you sell. The gain attributable to real-property depreciation you claimed is taxed as unrecaptured Section 1250 gain at a maximum federal rate of 25%, while depreciation on 5- or 15-year components is recaptured as ordinary income under Section 1245.
Depreciation still usually wins: you defer tax for years, you may be in a lower bracket at sale, and much ordinary-rate income is converted into a capped 25% rate. Investors who want to avoid recapture entirely often use a 1031 exchange to roll the gain into a replacement property, or hold until death so heirs receive a stepped-up basis. Either way, plan for recapture rather than being surprised by it.
Where you report the deduction
Rental depreciation is calculated on Form 4562 in the year you place each asset in service, then flows to Schedule E, where it reduces your net rental income or increases your rental loss. In later years, once assets are already on your schedule, you generally do not need to refile Form 4562 unless you add a new asset or make an election. Keep a running depreciation schedule — a simple table listing each asset, its basis, placed-in-service date, method, recovery period, and accumulated depreciation. That schedule is what your tax software or preparer relies on every year, and it is the exact record you will need to compute recapture when you sell.
A quick sanity check on your numbers
Two fast checks catch most errors. First, your steady annual residential deduction should equal the building basis divided by 27.5 — for example, $275,000 ÷ 27.5 is exactly $10,000. If a full year shows something very different, revisit the basis or the recovery period. Second, total accumulated depreciation should never exceed the depreciable building basis; once the basis is fully recovered, depreciation simply stops. If you are unsure whether a component belongs on a 5-, 15-, or 27.5-year schedule, the rental property depreciation calculator and the cost segregation calculator lay out each layer so the totals reconcile.
How depreciation affects your actual tax bill
Depreciation is a non-cash deduction — you write it off without spending a dollar that year, which is what makes it so valuable. On a property netting $12,000 of cash flow with a $9,000 depreciation deduction, only $3,000 is taxable, and a large enough deduction can produce a paper loss even while the property is cash-flow positive. Whether you can use that loss against other income depends on the passive activity rules: most investors offset only passive income, though those with modified AGI under $100,000 who actively participate may deduct up to $25,000 of rental losses against ordinary income, phasing out by $150,000. Unused losses carry forward and release at sale.
Frequently asked questions
What is the depreciation period for a rental?
27.5 years for residential rental property, 39 years for commercial.
Can I depreciate the land?
No. Only the building and improvements are depreciable.
How do I find the land value?
Many investors use the county assessor's land-to-building ratio to support a reasonable split.
Do I have to take depreciation, or is it optional?
It is effectively mandatory. At sale the IRS reduces your basis by the depreciation 'allowed or allowable' whether or not you actually claimed it — so skipping it means you owe recapture on deductions you never received. Always claim it, and use Form 3115 to catch up missed years.
How is the first year prorated?
Residential rental real estate uses the mid-month convention: the property is treated as placed in service in the middle of the month it became available to rent, so the first-year deduction covers only part of the year and depends on which month you started.
Are closing costs depreciated or deducted right away?
Most acquisition closing costs — title fees, transfer taxes, recording fees, legal fees — are added to your depreciable basis and recovered over 27.5 years. Loan costs such as points are amortized over the loan term instead, and prorated taxes are deducted separately.
Can I depreciate appliances and carpet faster than the building?
Yes. Appliances, carpeting, and furniture are 5-year property, and land improvements like fencing and driveways are 15-year property. A cost segregation study separates these from the 27.5-year shell so they can be written off much sooner, often with bonus depreciation.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.