Each day, thousands of rental properties generate income across the U.S. On average, landlords earn over $35,000 more per year than the median household.
Sounds lucrative, right?
But owning a rental property isn’t just about collecting rent—it also entails managing expenses, optimizing tax benefits, and ensuring long-term financial stability.
One of the most powerful yet often misunderstood tax-saving tools available to real estate investors is depreciation—allowing you to recover the cost of your property over time. However, maximizing this benefit isn’t automatic. It requires careful tracking, accurate categorization, and proactive financial planning.
Failing to manage depreciation properly could mean under-claiming deductions, overpaying in taxes, or facing unexpected tax liabilities when you sell.
This blog will break down how rental property depreciation works in 2025, how to maximize deductions, and how to stay compliant with IRS regulations while securing long-term financial gains.
What is rental property depreciation?
Rental property depreciation is an accounting principle that allows you to deduct the cost of buying or improving a rental property over its useful life. Instead of taking a large tax deduction in the year you purchase the property, depreciation lets you spread these costs out by deducting a portion of the property’s value each year.
Also read: Definition and types of depreciation with examples
Let’s say you purchase a rental property for $275,000, with $50,000 allocated to the land and $225,000 allocated to the building. Since land is not depreciable, only the building’s value can be depreciated.
Under the IRS rules, residential rental properties are depreciated over 27.5 years using the General Depreciation System (GDS). This means each year, you can deduct 3.636% of the building’s value from your taxable income.
Here’s how the depreciation calculation works:
- Building Value Eligible for Depreciation: $225,000
- Annual Depreciation Deduction: $225,000 ÷ 27.5 = $8,181 per year
Each year, you can claim $8,181 as a depreciation expense, reducing your taxable rental income. If your rental income for the year is $30,000, applying depreciation lowers your taxable amount to $21,819. This deduction helps reduce your tax liability and could even place you in a lower tax bracket, depending on your total income.
This gradual deduction continues until you’ve fully depreciated the property or you sell it, at which point depreciation recapture rules come into play.
What residential rental property can be depreciated?
If you own a residential rental property, like a house or an apartment building, you may be able to depreciate it over time, but certain criteria need to be met. To qualify, at least 80% of the property’s rental income must come from dwelling units—places where people live full-time. This means that properties like hotels or motels, where more than half of the rooms are used as temporary lodging, don’t qualify.
According to the IRS, you can claim a depreciation deduction on residential rental property if:
- You own the property (even if it’s mortgaged or under debt).
- You use the property to generate rental income.
- The property has a definable “useful life” of more than one year.
However, depreciation is off the table if you start and stop renting the property within the same year. For example, if you purchase a rental property in January and sell it or take it off the market before December, you can’t claim a depreciation deduction.
Depreciation applies to property that wears out, decays, or loses value over time. If something on your property wears out within a year, you can usually deduct that expense as a regular rental cost instead. But remember, land itself can’t be depreciated since it doesn’t wear out or get used up. So, if you own a rental home on an acre of land, only the house is eligible for depreciation, not the land it sits on.
Certain land-related costs like clearing, grading, or landscaping also can’t be depreciated since they’re considered part of the land. However, there are exceptions—if, for instance, you plant trees so close to a house that they would need to be removed if the house were replaced, you might be able to depreciate the planting costs along with the house over its useful life.
What rental properties benefit most from depreciation?
Not all rental properties offer the same depreciation benefits. Some properties generate higher tax deductions than others due to their structure, cost allocation, and usage.
Also read: 18 popular tax deductions for business owners in 2024-2025
Here are the rental properties that benefit the most from depreciation:
1. Properties with a high building-to-land ratio
Since land is not depreciable, properties where the majority of the purchase price is allocated to the building rather than the land offer greater depreciation benefits. For example:
- A single-family rental home in a highland-value area (e.g., beachfront property) will have lower depreciation deductions than an apartment building in a suburban area where land is a smaller portion of the total value.
- Multi-unit buildings (e.g., duplexes, triplexes, apartment complexes) tend to have higher depreciable values since the land value is proportionally lower.
2. Older properties needing renovations
Older rental properties that require capital improvements (such as replacing the roof, upgrading HVAC systems, or installing new flooring) allow investors to claim depreciation on improvements in addition to the property’s original cost. Properties that frequently require upgrades provide additional depreciation deductions over time.
3. Short-term rentals and vacation properties
- If a short-term rental property (Airbnb, VRBO) meets IRS rental activity rules, it may qualify for accelerated depreciation methods, such as cost segregation studies, which allow owners to front-load depreciation deductions in the early years.
- These properties can also benefit from bonus depreciation (which is phasing out but still partially available in 2025).
4. Rental properties with significant non-structural assets
If a rental property includes depreciable assets such as:
- Furniture and appliances (e.g., furnished rentals, corporate housing)
- Outdoor improvements (e.g., fences, walkways, lighting)
- Specialty systems (e.g., security systems, irrigation systems)
these assets may qualify for shorter depreciation periods (5-15 years instead of 27.5 years).
Are improvements made to residential rental property included in depreciation?
Yes, improvements made to a residential rental property can be depreciated, but they follow different rules than regular maintenance expenses. Unlike repairs, which can be deducted in the year they occur, capital improvements must be depreciated over time.
What qualifies as an improvement?
The IRS considers an improvement to be any addition or upgrade that:
- Increases the property’s value (e.g., adding a new roof or building an extra room)
- Extends the useful life of the property (e.g., replacing plumbing or electrical systems)
- Adapts the property to a new use (e.g., converting a garage into a rental unit)
These improvements must be depreciated over their assigned recovery periods based on IRS guidelines.
For example:
- Residential rental buildings and major structural improvements → 27.5 years (GDS)
- Land improvements (fences, driveways, landscaping) → 15 years (GDS)
- Appliances, carpeting, and furniture → 5-7 years (depending on type)
What about bonus depreciation?
Bonus depreciation, which allows property owners to immediately deduct a percentage of eligible improvement costs rather than spreading them over years, is being phased out. In 2025, only 40% of eligible property improvements can be deducted upfront. By 2026, this percentage drops to 20%, and in 2027, bonus depreciation will be eliminated entirely.
If you’re planning significant upgrades to your rental property, timing improvements before the full phase-out could help maximize tax savings. Understanding how these changes affect depreciation allows rental property owners to strategically manage costs and tax liabilities.
When does depreciation of rental property begin?
You can’t start taking depreciation deductions on a rental property or its improvements the moment you purchase or pay for them. The IRS requires that the property be “in service,” meaning it must be ready and available to generate rental income—even if it’s not actually being rented out yet.
For instance, imagine you install new kitchen cabinets in your rental property. You buy the cabinets in May, but they aren’t fully installed and functional until June. In this scenario, you can’t start depreciating the cabinets until June, when they are ready to contribute to the rental income. If they had been installed right away in May, that would be the starting point for depreciation, even if the property remained unoccupied until later.
If you decide to convert your personal residence into a rental property, depreciation begins as soon as the home is ready and available for rent. It doesn’t matter that the home was previously non-depreciable as your residence; once it meets all the criteria for a rental property, you can start claiming depreciation.
Even if your rental property is temporarily vacant, you can continue to take depreciation deductions. For example, if your rental property is empty while you make repairs after a tenant moves out, you can still depreciate the property during this downtime. The key is that the property remains available for rent once the repairs are complete.
Keep in mind that if you start using a property for rental purposes partway through the calendar year, your depreciation deduction for the first year will be prorated. For specific details on how much you can depreciate each month, refer to the monthly percentages for residential rental property in IRS Publication 527[1].Here’s the percentage table to give you a quick overview:
| January | 3.49% |
| February | 3.18% |
| March | 2.88% |
| April | 2.58% |
| May | 2.27% |
| June | 1.97% |
| July | 1.67% |
| August | 1.36% |
| September | 1.06% |
| October | 0.76% |
| November | 0.46% |
| December | 0.15% |
When does depreciation of rental property end?
Depreciation on rental property doesn’t continue indefinitely. It ends under one of two circumstances:
- You’ve fully deducted your “cost basis” in the property. The cost basis typically includes the initial price you paid for the rental property, along with any associated taxes and fees from the settlement, and the cost of any improvements you’ve made. However, certain events like insurance payouts for property damage or payments received for granting an easement can decrease your basis.
- You take the property out of service. This happens when the property is no longer used to generate income, whether because it’s been sold, destroyed, or you’ve decided not to rent it out anymore.
How to depreciate residential rental property
The has been the standard for depreciating property since 1987. Under MACRS, you have two main depreciation methods to choose from: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS).
For most properties, GDS is the go-to method, allowing you to recover the cost of residential rental property more swiftly. However, if ADS suits your financial strategy better, you have the option to choose it.
Keep in mind, if you decide to use ADS for your residential rental property, you need to make this decision in the first year the property is in service, and once chosen, switching to GDS in subsequent years isn’t permitted.
If your property was put into service before 1987, you’ll need to refer to older depreciation methods such as the Accelerated Cost Recovery System (ACRS), straight line, or declining balance methods. For details on these, IRS Publication 534[3]will guide you through the specifics.
How to calculate depreciation on residential rental property
The annual depreciation deduction you can take for residential rental property is influenced by several factors: your cost basis in the property, the designated recovery period, and the date the property begins service.
Your “cost basis” is essentially the initial amount you paid for the property, inclusive of any expenses related to the purchase. Should you upgrade the property, these additional expenditures will be depreciated separately.
The recovery period is an estimate of the property’s lifespan, which varies based on the type of property and the depreciation method applied. For residential rental properties, this period spans 27.5 years under the General Depreciation System (GDS). Under the Alternative Depreciation System (ADS), residential rental property placed in service after 2017 is depreciated over 30 years, while properties placed in service before 2018 follow a 40-year recovery period.
When a property is put into service partway through the year, its depreciation for the first and final year is adjusted accordingly. The IRS employs the “mid-month convention” for residential rental properties, meaning any property placed in service or taken out of service in a given month is considered to have been in service at the mid-point of that month.
Let’s make it simpler with an example.
Suppose you purchase a duplex on April 10 for $300,000 and incur $25,000 in taxes and fees at closing. This gives you a total cost basis of $325,000 ($300,000 + $25,000). The duplex becomes ready to rent on May 5, but under the IRS’s mid-month convention, May 15 is considered the in-service date. If you’re applying the General Depreciation System (GDS), the recovery period for the property is 27.5 years.
Based on these details, here’s how your depreciation deductions might look:
- For the first year, the depreciation deduction is $7,875, which represents 2.424% of the cost basis. This percentage reflects the prorated depreciation from May 15 to year-end.
- For the full years from the second through the 27th year, each year’s depreciation deduction is $11,818, equivalent to 3.636% of the cost basis. The total for these years comes to $312,674.
- For the final part-year, the depreciation is $7,043, calculated at 2.166% of the cost basis, covering the partial year at the end of the depreciation period.
The total depreciation over the life of the property would be $327,592, slightly over the original cost basis due to rounding in the yearly calculations. This example illustrates how each portion of the property’s useful life contributes to reclaiming your initial investment through tax deductions.
But what if you make adjustments to the property?
Suppose a few years into owning the duplex, you decide to enhance the property by installing a fence around the backyard at a cost of $3,500. The depreciation of this improvement must be calculated separately because it has a different recovery period and method due to its nature.
The IRS specifies a 15-year recovery period for residential property fencing under the General Depreciation System (GDS).
Let’s assume the fence is installed in October and, considering the IRS’s mid-quarter convention for property improvements made later in the year, the fence is treated as if it was placed in service on November 15.
- For the first year, with the fence considered placed in service at the midpoint of the final quarter, the depreciation is approximately $44, calculated as 1.25% of the $3,500 cost. This reflects depreciation from November 15 to the end of the year.
- For the second year, depreciation is $346, representing 9.88% of the cost basis.
- In the third year, the amount decreases slightly to $311, which is 8.89% of the cost basis.
- The fourth year sees a depreciation of $280, or 8% of the cost basis.
- By the fifth year, the figure further reduces to $252, which is 7.2% of the cost basis.
- The sixth year involves a deduction of $227, equating to 6.48% of the cost basis.
- From the seventh to the 15th year, each year’s depreciation averages around $207, which is between 5.9% or 5.91% of the cost basis, totaling approximately $1,863 for these nine years.
- In the final year, the depreciation is about $181, calculated at 5.17% of the cost basis.
Adding up all these depreciation deductions over the 15 years would closely align with the $3,500 investment. This shows how improvements, even years after the initial purchase, can still offer tax benefits through depreciation, aligning exactly with the total investment made in enhancing the property.
How to report rental property depreciation to the IRS
Depreciation is typically reported on Schedule E (Form 1040). However, Form 4562 is required when claiming depreciation for the first time or when adjusting depreciation due to property improvements or changes in use.
If you’re unsure about which form to use or how to file, it’s wise to consult a tax preparer or financial advisor.
For most people renting out residential property, rental income must be reported on their tax returns. An exception exists if the property is primarily used as your personal residence and rented out for no more than 15 days a year; in such cases, you neither report the rental income nor deduct any rental expenses.
In addition to depreciation, rental property owners can deduct expenses such as mortgage interest, property management fees, maintenance costs, and property taxes. The IRS provides a comprehensive list of deductible expenses[4]to help maximize tax benefits.
How is depreciation taxed on the sale of rental property?
Depreciation lowers taxable income during ownership, but it also impacts taxes when the property is sold. Because depreciation reduces the property’s cost basis, more of the sale price is treated as taxable gain, subject to two types of taxes:
1. Depreciation recapture tax (up to 25%)
- The IRS requires property owners to pay taxes on the depreciation they previously deducted when they sell the property.
- This is called depreciation recapture and is taxed at up to 25% on the portion of the gain attributable to past depreciation deductions.
2. Capital gains tax (typically 15-20%)
- Any remaining gain beyond the recaptured depreciation is taxed as capital gains, with tax rates depending on your income.
- Capital gains tax rates for most rental property sales are 15-20%, plus any applicable state taxes.
Example: How depreciation affects taxes on a rental property sale
Let’s say:
- You purchased a rental property for $350,000 ($50,000 allocated to land and $300,000 to the building).
- Over 10 years, you claimed $109,090 in depreciation deductions.
- You sell the property for $600,000 after 10 years.
Step 1: Determine adjusted cost basis
- Original cost basis: $350,000
- Less depreciation taken: $109,090
- Adjusted cost basis: $240,910
Step 2: Calculate total gain
- Sale price: $600,000
- Less adjusted cost basis: $240,910
- Total taxable gain: $359,090
Step 3: Apply tax rates
- Depreciation recapture tax (25%) on $109,090 → $27,272
- Capital gains tax (15%) on remaining $250,000 → $37,500
- Total tax liability = $64,772
The bottom line:
Depreciation is one of the most valuable tax advantages for rental property owners, but without proper tracking and categorization, it can quickly become a tax liability instead of a benefit.
IRS rules, depreciation recovery periods, and tax deductions all hinge on accurate financial records. If costs aren’t properly recorded, you risk under-claiming deductions, overpaying in taxes, or triggering IRS penalties for misreported gains.
That’s why accurate bookkeeping isn’t just part of managing depreciation—it’s the foundation of a tax-efficient real estate investment strategy. At CoCountant, we ensure every depreciation claim, property expense, and capital improvement is accurately tracked, categorized, and optimized for maximum tax savings—so you can focus on building your real estate portfolio.
Build a smarter tax strategy with expert bookkeeping—so when it’s time to file taxes (or sell), you don’t leave money on the table.
Let’s get your rental property finances in order.
FAQs
1- What’s the rental property depreciation income limit?
There is an income threshold for owners to depreciate rental property. If your gross income is $100,000 or less, you may deduct up to $25,000 in losses annually. However, real estate professionals who own rental properties can deduct losses against their non-passive income without limitation.
2- What happens to depreciation when a rental property is sold?
Depreciation on a rental property offers tax benefits during ownership but involves specific considerations upon sale. For example, if you bought a property for $200,000 and claimed a total depreciation of $25,000, your adjusted cost basis becomes $175,000. If you sell the property for $250,000, the capital gains are calculated on a profit of $75,000, rather than $50,000. This increase is due to depreciation recapture.
3- What happens if I don’t claim depreciation on a rental property?
It’s not uncommon for first-time real estate investors to miss claiming depreciation, especially if they manage their taxes independently. If you’ve neglected to claim this deduction, you can still do so retroactively by amending your tax return using Form 1040X and the relevant schedules. This correction will allow you to claim the missed tax benefits.
4- How do you avoid depreciation recapture tax on rental property?
To avoid paying depreciation recapture tax, consider a 1031 exchange if you’re selling your rental property and planning to reinvest in another investment property of equal or greater value. This strategy allows you to defer taxes on capital gains, depreciation recapture, state taxes, and the Net Investment Income Tax (NIIT) by rolling over the proceeds into a new investment.
5- How to claim the depreciation deduction for rental property?
Normally, you would record your rental income and deductions, including depreciation, on Schedule E. However, if you provide substantial services for your tenants’ convenience, such as frequent cleaning or linen changes, you should report your depreciation on Schedule C instead. This is because these services can classify your rental activity as a more active business.
6- I want to renovate my rental property. Should I get a depreciation schedule?
Yes, obtaining a depreciation schedule is highly advisable if you plan to renovate your rental property. A depreciation schedule will outline the depreciation deductions available for both the existing components of the property and any new renovations. This can help you maximize your tax benefits over the useful life of the property and the renovations.
7- I bought my rental property fully renovated. Can I claim depreciation for the renovation?
Yes, you can claim depreciation for the renovations made to the property before your purchase, but only if you know the value of these renovations. This value should have been separated from the purchase price at the time of buying the property. If the cost of renovations is included in the total purchase price, your accountant can help you determine a reasonable allocation to depreciate.
8- Doesn’t my accountant calculate depreciation for my rental property?
Typically, yes, your accountant will handle the calculation of depreciation for your rental property as part of preparing your tax returns. They will use all relevant financial information, including purchase price, improvements, and renovations, to calculate the annual depreciation deductions accurately. However, it’s a good idea to understand the process and be involved, as you’ll need to provide detailed information about the property and any subsequent investments in renovations or improvements.
