Rental Property Depreciation Calculator: 27.5-Year Schedule

Rental property depreciation is the building's cost (not the land) divided by 27.5 years, with a smaller first year based on the month you placed it in service. A $300,000 rental with $6,000 of closing costs and 20% land value has a $244,800 depreciable basis: $8,902 a year, and $8,531 in a first year that starts in January. Enter your numbers to see your own deduction and the full schedule.

The formula IRS Publication 527 uses

Residential rental property is depreciated under MACRS GDS over 27.5 years, straight line, with the mid-month convention (IRS Publication 527, chapter 2; Publication 946). Depreciable basis = (purchase price + settlement costs you must capitalize + improvements) × building share. Yearly depreciation = basis ÷ 27.5 = 3.636% of basis. In the first year you get (12 − month + 0.5) ÷ 12 of that, because the property is treated as placed in service in the middle of its month. The remainder is taken in year 28 (or 29), so the full basis is recovered.

Separating land from the building

Land never wears out, so it is never depreciated. Split the total cost using the county assessor's land and improvement values (their ratio is what most taxpayers and preparers use) or an appraisal. In many suburbs land is 15% to 30% of the value; in expensive cities it can be more than half. A higher land share lowers the deduction.

Deductions by purchase price

Assuming 2% closing costs, 20% land and a 22% tax bracket. The tax saving is a rough estimate: rental losses can be limited by the passive activity rules, and depreciation reduces your basis.

Depreciation recapture when you sell

Depreciation you took (or could have taken) is taxed when you sell, as unrecaptured section 1250 gain at a maximum rate of 25% (IRS Topic 409). After 10 years on the example, about $88,647 of depreciation has been taken; at 25% that is up to $22,162 of tax on sale, on top of capital gains tax on any appreciation. A 1031 exchange can defer it.

• Depreciating the land Only the building and improvements are depreciable. Using the full price overstates the deduction.
• Starting at the purchase date Depreciation starts when the property is ready and available to rent (placed in service), not when you closed.
• Skipping depreciation to avoid recapture Recapture applies to depreciation allowed or allowable, so skipping it doesn't avoid the tax on sale; it only loses the deduction.
• Expensing improvements A new roof or addition is a capital improvement with its own 27.5-year schedule from the month it's placed in service; repairs are deducted in the year paid.

Where it goes on your return

Depreciation is figured on Form 4562 in the first year and reported with your rental income and expenses on Schedule E. This calculator is an estimate for planning; a tax professional can confirm your basis, land allocation and any cost segregation.

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