Real Estate Tax Calc
The two schedules
Residential rental property uses a 27.5-year straight-line schedule; commercial uses 39 years. Shorter recovery means a larger annual deduction per dollar of building basis.
What counts as residential
Property is residential for this purpose if it derives 80%+ of its rental income from dwelling units. Mixed-use buildings can require an allocation.
Effect on cash flow
A residential building throws off more depreciation each year, sheltering more income — one reason small investors favor residential rentals.
Side-by-side example on a $1M building
Put $1,000,000 of depreciable building basis (land excluded) on each schedule. Residential at 27.5 years yields about $36,360 a year; commercial at 39 years yields about $25,640 a year — a difference of roughly $10,700 in annual deductions. For an investor in a 32% bracket, that's about $3,400 more in yearly tax savings from the residential schedule. Over a decade, residential shelters roughly $107,000 more of income than commercial on the same basis.
The tradeoff: because residential depreciates faster, its adjusted basis falls faster, which means a larger taxable gain (and more depreciation to recapture) when you eventually sell.
The 80% dwelling-unit test in practice
The 27.5-year period applies only if the building is residential rental property — defined as deriving 80% or more of its gross rental income from dwelling units. A dwelling unit is living quarters, not a hotel, motel, or other establishment where more than half the units are used on a transient basis. A mixed-use building — apartments over ground-floor retail, say — must be tested each year. If residential rents fall below 80% of the total, the entire building shifts to the 39-year commercial schedule for that year, so the mix can matter more than owners expect.
How land allocation affects both
Neither schedule lets you depreciate land — only the building and its structural improvements. The split between land and building is one of the biggest levers on your deduction. Common methods include using the county assessor's land-to-building ratio, a formal appraisal, or an insurance replacement-cost estimate. A higher building allocation means more depreciation each year, but it must be defensible: the IRS can challenge an aggressive split. Land improvements like paving, fencing, and landscaping are separately depreciable as 15-year property under either schedule.
Cost segregation applies to both
Whether residential or commercial, a cost segregation study can carve out 5-, 7-, and 15-year components (carpet, cabinetry, dedicated wiring, site improvements) that depreciate far faster than the 27.5- or 39-year building shell — and may qualify for bonus depreciation in year one. Because the commercial 39-year shell is so slow, cost segregation often delivers a proportionally larger acceleration on commercial buildings, though it benefits residential rentals too.
Which should an investor prefer?
There's no single answer — the recovery period is dictated by the property's actual use, not a choice you make. But when comparing deals, remember that a residential rental shelters more income per year, which helps investors who need the deductions currently. Commercial buildings often offset the slower schedule with triple-net leases, longer terms, and different appreciation dynamics. Model the after-tax cash flow, not just the headline deduction, and factor in the larger recapture that comes with faster depreciation.
The recapture side of the coin
Faster depreciation isn't free money — it's a timing benefit. Both schedules feed the same unrecaptured Section 1250 gain, capped at 25% federal, when you sell. A residential building that depreciated quickly will have a lower adjusted basis and therefore more recapture. The deductions are still valuable because of the time value of money and the chance to defer the reckoning with a 1031 exchange or eliminate it with a step-up in basis at death.
The mid-month convention applies to both
No matter which schedule a building uses, real property is subject to the mid-month convention: it's treated as placed in service in the middle of whatever month it becomes available for rent, and disposed of in the middle of the month you sell. So a residential rental first available in September gets 3.5 months of depreciation in year one, and a commercial building sold in April gets 3.5 months in its final year. This is why your first- and last-year deductions on either schedule are partial, and why the full recovery actually spans 28.5 or 40 calendar years.
What each schedule covers
Both the 27.5- and 39-year periods apply to the building shell and its structural components — foundation, framing, roof, permanent walls, plumbing, electrical, and HVAC that's part of the structure. Neither covers land, and both let you break out separately depreciated items: personal-property components (5- or 7-year) and land improvements like parking lots, sidewalks, and fencing (15-year). Identifying those shorter-life pieces through a cost segregation study is what lets an owner accelerate deductions well beyond the slow building schedule.
ADS: when the longer schedule is forced
Some owners don't get to use the faster GDS period at all. Under the Alternative Depreciation System, residential rental runs 30 years and commercial 40 years. ADS is required for property used predominantly outside the U.S., tax-exempt use property, and — importantly for many landlords — property of a real-property trade or business that elects out of the business-interest deduction limit under Section 163(j). That election is often made to preserve interest deductions, but the price is slower depreciation, so weigh the two before choosing.
How the choice flows to recapture
Whichever period applies, the accumulated depreciation you claim becomes unrecaptured Section 1250 gain at sale, taxed at a maximum of 25% federal. Residential's faster write-off means you'll typically have more accumulated depreciation to recapture at any given point in the hold than an identical commercial building. That's not a reason to avoid the deductions — it's a reason to plan the exit, whether through a 1031 exchange to defer, an installment sale, or holding to death for the basis step-up that wipes the deferred tax out for heirs.
Bottom line for buyers comparing deals
When you underwrite a property, translate the recovery period into after-tax cash flow rather than eyeballing the sticker deduction. A residential rental hands you more depreciation each year, which is especially valuable if you can use the losses currently. A commercial building depreciates slower but may come with stronger leases and tenant credit. Run both through a depreciation calculator with your actual land/building split and marginal rate, and remember that a cost segregation study can reshape either schedule's early-year numbers substantially.
State conformity can change the numbers
Federal recovery periods are only half the story. Most states start from federal taxable income and accept the 27.5/39-year deductions, but a handful decouple from federal rules — especially around bonus depreciation on the shorter-life components a cost segregation study creates. States like California don't conform to federal bonus depreciation, so you may claim a big first-year deduction federally and a much smaller one on your state return, then track a separate state basis for years. If you invest across state lines, check each state's conformity before assuming the federal schedule carries over.
Improvements ride their own schedules
The building's 27.5 or 39 years applies to the original structure, but improvements you make later start fresh schedules from their own placed-in-service dates. A new roof on a residential rental is a 27.5-year asset beginning the year you install it; a tenant build-out in a commercial space may qualify as 15-year qualified improvement property. This is why a mature rental often has a stack of overlapping depreciation schedules rather than one clean line, and why keeping each improvement documented separately matters at sale.
A simple decision framework
When you can't change the recovery period but want to maximize early deductions, focus on the levers you can pull: get a defensible, building-heavy land allocation; break out 5-, 7-, and 15-year components with a cost segregation study; and place improvements in service in years you can use the deductions. Then, on the back end, plan the exit — 1031 exchange, installment sale, or step-up at death — so the faster residential write-off doesn't hand you an oversized recapture bill you didn't plan for.
Where each schedule shows up on your return
Both residential and commercial depreciation are computed on Form 4562 and flow to Schedule E for rental real estate. The form asks for the recovery period (27.5 or 39), the method (straight line for the building), and the convention (mid-month). If you hold the property in a partnership or S corporation, the depreciation is computed at the entity level and passed through to you on a Schedule K-1. Either way, keep the year-by-year schedule so the accumulated total is ready when you sell and need to figure recapture.
Frequently asked questions
Which form reports rental depreciation?
Form 4562, with the deduction carried to Schedule E — the same forms for both 27.5-year residential and 39-year commercial property.
Does a mixed-use building use one schedule or two?
It's tested on the 80% dwelling-unit income rule each year. If residential rents are at least 80% of gross rental income, the whole building uses 27.5 years; otherwise it uses the 39-year commercial schedule.
What's the depreciation period for residential vs commercial?
27.5 years residential, 39 years commercial, both straight line.
Which gives a bigger deduction?
Residential — the shorter 27.5-year schedule means a larger annual deduction per dollar of basis.
When does a residential building switch to the 39-year schedule?
When less than 80% of its gross rental income comes from dwelling units in a given year — a risk for mixed-use buildings with significant commercial space.
Do both schedules exclude land?
Yes. Only the building and improvements are depreciable under either period; land is never depreciated, though 15-year land improvements are.
Does a short-term rental use the 27.5-year schedule?
Not necessarily. Property used on a transient basis (average stays where more than half the units turn over quickly) can be treated as 39-year nonresidential property, so many short-term rentals depreciate over 39 years.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.