Guide for rental owners
How rental property depreciation works
The deduction your building gives you every year, without spending a dime.
Depreciation is often a rental owner's biggest deduction, and it costs nothing out of pocket. The IRS assumes your building wears out over time, so it lets you deduct part of what you paid for it every year, even while the property is going up in value.
What you can depreciate
You depreciate the building, not the land. Land doesn't wear out, so its value is never deducted. Your starting point (your "basis") is usually what you paid for the property plus certain closing costs, minus the value of the land. Improvements you make later, like a new roof or water heater, are depreciated too, each on its own schedule.
The 27.5-year rule
A residential rental building is depreciated in equal amounts over 27.5 years. The first year is prorated by the month the property was placed in service (ready and available to rent), so a rental bought in the fall gets a smaller deduction that first year.
Example
You buy a rental for $360,000 and the land is worth a quarter of that. The building is $270,000 → about $9,800 of depreciation every year. At a 32% tax rate, that's roughly $3,100 a year in tax you don't pay.
Improvements have their own schedules
| What you added | Typical recovery period |
|---|---|
| Roof, HVAC, plumbing, windows, additions | 27.5 years |
| Appliances, carpet, furniture | 5 years |
| Fencing, paving, landscaping | 15 years |
Smaller items may not need depreciating at all: see the de minimis safe harbor. Not sure whether something is an improvement or a repair? Read repair or improvement.
When you sell
Depreciation lowers your taxes while you own the property, and some of it is "recaptured" (taxed, at a rate of up to 25%) when you sell. The IRS treats you as having taken the depreciation you were allowed whether you claimed it or not, so skipping it doesn't avoid recapture. It just means you missed the savings. Your CPA can plan around this when the time comes.
Tethered Properties does this for you
Tethered Properties works out your building's depreciation when you add your property, tracks every improvement on the right schedule, and shows what it saves you in tax all year.
This guide is general information for rental owners, not tax advice. Tax rules change and every situation is different; your CPA or tax advisor knows your full picture. Figures are estimates.