Depreciation is an annual tax deduction that lets a landlord recover the cost of a rental building over time, reflecting the idea that the structure wears out with use. For residential rental property, the building is depreciated using the straight-line method over 27.5 years under MACRS (the Modified Accelerated Cost Recovery System). It is one of the most significant deductions available to landlords because it is a paper expense — you claim it without spending cash that year.
This is educational — it is not tax advice. Confirm specifics with a qualified tax professional and see IRS Publication 527 (Residential Rental Property).
A few core rules define residential rental depreciation:
The result is a yearly depreciation deduction reported on Schedule E alongside your cash operating expenses.
Two things drive the number: the building's cost basis and the land/building allocation. A higher building basis produces a larger annual deduction; a larger land allocation reduces it (because land is not depreciable). Allocations are often estimated using the property tax assessor's split between land and improvements, or an appraisal — this is a good item to document and confirm with a professional.
Depreciation recapture at sale. Depreciation is not free forever. When you sell the property, the depreciation you claimed (or were allowed to claim) is generally subject to depreciation recapture, which can be taxed when you dispose of the property. Because recapture affects the true after-tax return on holding versus selling, factor it into any sale decision and review it with a tax advisor.
Residential rental buildings are depreciated straight-line over 27.5 years under MACRS on the building's cost basis; land is not depreciable, so basis must be split. Depreciation lowers taxable rental income each year, but prior depreciation is subject to recapture when you sell.
Educational only — confirm specifics with a tax professional and see IRS Publication 527 and Schedule E.