Real Estate Tax Calc
The three inputs every depreciation calculation needs
Every rental property depreciation calculation starts with three inputs: (1) the depreciable basis, which is the portion of your total cost attributable to buildings and improvements (excluding land); (2) the placed-in-service date, which is the date the property was first available for rent; and (3) the property type, which determines the recovery period — 27.5 years for residential rental (single-family, duplex, fourplex, or any structure where at least 80% of gross rental income comes from dwelling units), or 39 years for nonresidential commercial property.
These three inputs — basis, date, and type — flow directly into a depreciation calculator and determine every year's deduction. The most common error is failing to separate land from the building when computing the depreciable basis; including land in the basis overstates deductions and creates an IRS adjustment risk on audit. The second most common error is using the wrong placed-in-service date — the correct date is when the property is ready and available for rent, not when the tenant moved in.
How to calculate your depreciable basis
Start with the purchase price of the property. Add any capitalized acquisition costs — typically attorney fees, title search and insurance, recording fees, and transfer taxes paid by the buyer. (Mortgage origination points and prepaid interest are not added to basis; they are separate deductions.) This gives you the total cost basis at acquisition.
Next, subtract the land value to arrive at the depreciable basis. The most common method is to use the county property tax assessor's allocation between land and improvements. If the assessor shows land as 20% of total value and you paid $350,000, your land basis is $70,000 and your depreciable basis is $280,000. Add major improvements over the life of the property to the basis as they are made; each improvement has its own placed-in-service date and may have its own recovery period. A new roof added in year 5 has a new 27.5-year (residential) or 39-year (commercial) depreciation schedule starting from that improvement date.
The mid-month convention: how partial years work
MACRS uses the mid-month convention for real property depreciation. Regardless of which day in a month you place the property in service, you are treated as having placed it in service on the 15th of that month. This means you get one-half month of depreciation for the month of placement, a full month for each subsequent month in that year, and one-half month for the month of disposition.
Properties placed in service in January get the most depreciation in year 1 (11.5 out of 12 months), while properties placed in service in December get the least (0.5 months). The IRS MACRS tables already incorporate the mid-month convention into their percentage tables — you can use the Table A-6 (residential) or A-7 (commercial) percentages from IRS Publication 946, which show the correct year 1 percentage based on the month placed in service.
Year 1 vs. full-year depreciation: working through an example
Example: You purchase a single-family rental in March. Purchase price: $320,000. County assessor land allocation: 25%. Acquisition costs (title, recording): $3,500.
Depreciable basis: ($320,000 + $3,500) × 75% = $242,625. Year 1 depreciation (March placed-in-service, mid-month convention: 10.5 months of 12): using the IRS Table A-6 March column, approximately 2.879% × $242,625 = $6,984. Full-year depreciation from year 2 onward: $242,625 ÷ 27.5 = $8,823 per year. The final year of the 27.5-year schedule receives only 1.5 months of deduction due to the mid-month convention. Total depreciation over the full schedule equals the complete depreciable basis of $242,625.
Tracking depreciation across years: Form 4562
Form 4562 (Depreciation and Amortization) is filed with your tax return for each year you claim depreciation on assets placed in service. For a rental property, the building is listed in Part III with its class (27.5-year residential or 39-year nonresidential), the month and year placed in service, the depreciable basis, and the prior depreciation allowed. The form computes the current-year deduction.
When you sell the property, you report on Form 4797 the total depreciation taken — the sum of all Form 4562 deductions across your entire ownership period. Missing a depreciation deduction in any year does not reduce your recapture liability — the IRS taxes you on the amount you could have taken, not just what you did take. Always take your full annual depreciation. If you discover missed depreciation from prior years, File Form 3115 (Change in Accounting Method) to claim a catch-up deduction in the current year without amending prior returns.
What happens to depreciation when you improve the property
Capital improvements made to the property after acquisition are added to basis and depreciated on their own schedule, starting from the date placed in service. Each significant improvement has its own basis, placed-in-service date, and recovery period. A new HVAC system placed in service in year 7 begins its own separate 27.5-year schedule starting in that year, while the original building continues on its original schedule.
Cost segregation can reclassify some improvement costs into shorter-lived asset classes. Specialty flooring, cabinetry, or built-in appliances in a residential rental may qualify as 5-year or 7-year personal property under MACRS. Land improvements such as a new parking surface, fencing, or exterior lighting are 15-year MACRS. All three may be eligible for bonus depreciation, which has been phasing down under the Tax Cuts and Jobs Act schedule. Applying bonus depreciation to improvement components can generate large current-year deductions in the year of the renovation.
Depreciation on a property you inherited
Inherited property receives a stepped-up basis equal to fair market value at the date of the decedent's death. The depreciation history on inherited property is irrelevant to the heir — the heir begins a fresh depreciation schedule based on the stepped-up FMV allocated between land and building, as if the property were newly acquired.
This makes inherited rental property one of the most tax-advantaged investments available: not only is there no capital gains tax on the appreciation that occurred during the prior owner's lifetime, but the heir gets to depreciate the property from its full current market value. A property the decedent purchased for $100,000 and depreciated to $50,000 of adjusted basis, now worth $600,000, gives the heir a fresh basis to begin depreciating over 27.5 or 39 years. The heir should obtain a qualified appraisal at the date of death to document the stepped-up FMV.
Using a depreciation calculator: what to check
Online depreciation calculators for rental property automate the IRS Publication 946 MACRS table lookups and compute each year's deduction. To use one accurately, you need: (1) the depreciable basis (building only, land excluded); (2) the month and year placed in service; (3) the property type (residential vs. commercial); (4) the depreciation method (straight-line is required for buildings); and (5) whether any prior depreciation has already been taken.
Output from a depreciation calculator is typically a year-by-year schedule showing the deduction for each year of the recovery period. This schedule should be saved and compared to what was actually claimed on each year's Form 4562 or Schedule E. The cumulative total at the time of sale is the key figure for Form 4797 recapture calculations. A discrepancy between claimed depreciation and the calculated schedule should be resolved with Form 3115 — you cannot simply claim extra depreciation on the year-of-sale return to make up missed deductions without going through the accounting method change process.
Depreciation when you convert a personal home to a rental
Converting a former primary residence into a rental triggers a special basis rule. When you place a personal-use home in service as a rental, your depreciable basis is the lesser of (1) your adjusted cost basis (original purchase price plus improvements) or (2) the property's fair market value on the conversion date — in each case reduced by the land portion. This rule, in Treasury Regulation 1.168(i)-4, prevents a taxpayer from depreciating a decline in value that occurred while the home was personal-use property.
Example: you bought a home for $250,000, it is now worth $220,000, and you convert it to a rental. Your depreciation basis starts from the lower $220,000 figure (minus land), not your $250,000 cost. If instead the home had appreciated to $300,000, you would use your lower $250,000 cost basis. This often surprises owners who expect to depreciate the current market value. Note the dual-basis wrinkle: for computing a loss on a later sale, the FMV-at-conversion basis applies, while for computing a gain, the original cost basis applies — a nuance worth reviewing with a CPA at conversion.
How depreciation stops in the year you sell
In the year you dispose of a rental property, you are entitled to a partial year of depreciation up to the month of sale, applying the same mid-month convention used for the first year. Under the mid-month convention, the property is treated as sold on the 15th of the disposition month — so a property sold in June gets 5.5 months of depreciation for that final year, and a property sold in December gets 11.5 months.
This final-year depreciation is not optional bookkeeping; it directly affects your gain and recapture calculation. The depreciation claimed in the year of sale increases your total accumulated depreciation, which lowers adjusted basis and raises the unrecaptured Section 1250 gain taxed at up to 25%. A depreciation calculator should prorate the disposition year correctly. Forgetting the partial final-year deduction is a common error that understates your allowable depreciation — and under the allowed-or-allowable rule, you owe recapture on the allowable amount whether or not you actually claimed it.
Bonus depreciation, Section 179, and the building shell
A frequent point of confusion is whether bonus depreciation or Section 179 expensing can be applied to a rental building itself. The answer is no for the building shell: residential rental structures (27.5-year) and commercial structures (39-year) are real property and are not eligible for bonus depreciation or Section 179. Only components with a MACRS recovery period of 20 years or less qualify for bonus depreciation — these are the shorter-lived assets a cost segregation study carves out, such as 5-year personal property (carpeting, appliances, certain fixtures) and 15-year land improvements (parking, fencing, landscaping).
Bonus depreciation percentages have changed under the Tax Cuts and Jobs Act schedule and subsequent legislation, and the rate depends on the year the asset is placed in service, so confirm the current-year percentage. Section 179 expensing is available for certain qualifying property but is subject to a taxable-income limitation. Because these rules change and interact with the passive loss limits, a depreciation calculator that only handles straight-line building depreciation will not capture cost-segregation-driven bonus depreciation — that requires a separate engineering study and professional modeling.
Frequently asked questions
How do I calculate depreciation on a rental property?
Divide the depreciable basis (purchase price minus land value, plus acquisition costs) by 27.5 for residential rentals or 39 for commercial. Apply the IRS mid-month convention to the first and last year. The annual deduction is roughly 3.636% of depreciable basis for residential.
What is the depreciation rate for residential rental property?
Under MACRS straight-line, the full-year depreciation rate is 3.636% (1/27.5). The first year is prorated using the mid-month convention based on the month placed in service.
Can I calculate depreciation myself or do I need software?
You can calculate it manually using IRS Publication 946 Appendix A tables. Tax software automates this. For complex properties with cost segregation, professional software or a CPA is recommended.
What if I never claimed depreciation on my rental?
The IRS taxes you on depreciation 'allowed or allowable' — the amount you could have claimed, not just what you did claim. File Form 3115 to claim a catch-up deduction for missed years in the current year without amending prior returns.
Does depreciation reset when I refinance?
No. Refinancing is not a taxable event and does not affect your depreciation basis or schedule. Only capital improvements, acquisitions, and dispositions affect the basis.
When does residential rental depreciation end?
The full 27.5-year schedule runs from the placed-in-service month to 27.5 years later, with the final year receiving 1.5 months of deduction due to the mid-month convention.
How do I calculate depreciation when I convert my home to a rental?
Use the lesser of your adjusted cost basis or the property's fair market value on the conversion date, reduced by the land portion, as your depreciable basis. This prevents depreciating a value decline that occurred while the home was personal-use.
Can I use bonus depreciation on the whole rental building?
No. The building shell (27.5-year residential or 39-year commercial) is not eligible for bonus depreciation or Section 179. Only components with a recovery period of 20 years or less — identified through cost segregation — can qualify.
Do I still take depreciation in the year I sell?
Yes. You take a partial year of depreciation up to the sale, using the mid-month convention. That amount increases your accumulated depreciation and your Section 1250 recapture on the sale.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.