How Rental Property Depreciation Works

Key Takeaways

• Depreciation reduces your taxable income by letting you deduct the cost of wear and tear over 39 years, even if your property is increasing in value.
• Bonus depreciation and cost segregation can accelerate those deductions, especially on items like furniture, appliances, and interior improvements.
• Short-term rental owners who actively manage their properties may unlock extra tax perks, including Section 179 expensing and 100% bonus depreciation.

Rental income might steal the spotlight, but seasoned investors know the real wins happen at tax time.

That’s because rent checks can fluctuate, but tax strategies deliver year-after-year savings that go straight to your bottom line. Depreciation is one of those strategies, but it’s not automatic and the IRS doesn’t make it simple. 

There are rules about what qualifies, how long you can deduct it, and how to handle rental property depreciation when you sell. We cover all of those topics in this article.

What Is Rental Property Depreciation?

Rental property depreciation is a tax deduction that lets real estate investors recover the cost of owning and maintaining a property over time. Instead of writing off the full cost of the property in the year you buy it, depreciation allows you to spread that deduction out gradually, typically over 39 years for short-term rentals.

This annual deduction helps account for the natural wear and tear of the property, even if its market value increases. It’s designed to reflect things like aging appliances, outdated finishes, or other components that decline in value over time.

Depreciation is one of the most valuable tax benefits available to rental property owners. It reduces your net rental income on paper, which lowers the amount of taxes you owe without requiring any new spending.

Whether you’re managing a long-term lease or running a short-term rental, depreciation can significantly improve your cash flow over time.

However, here’s what you absolutely need to know about rental property depreciation:

The IRS treats depreciation like you claimed it, even if you didn’t.
So when you sell, you’ll still owe taxes on the depreciation you could have claimed.
That means ignoring it now doesn’t save you. It just costs you later on down the line. 

We’ll get into the details later, but for now: if you own rental property, depreciation isn’t optional. It’s one of the most important tools for keeping more of your profits.

Key rental property depreciation terms 

To calculate depreciation and stay compliant with IRS rules on rental property depreciation, you’ll need to understand a few key terms. 

Here’s a quick breakdown.

• Depreciable property: You can only depreciate the value of the building and any improvements made to it, not the land underneath. Land doesn’t “wear out,” so it’s excluded from depreciation.
• Useful life: The IRS sets the depreciation period for residential rental property at 39 years. That’s the period over which you’ll spread out your depreciation deductions.
• Cost basis: This is the total amount you spent to acquire and prepare the property for rental use. It typically includes the purchase price, eligible closing costs, and significant pre-rental improvements (like a new roof or HVAC system).
• Depreciation formula: (Cost basis - land value) ÷39 = annual depreciation deduction.This gives you the amount you can deduct from your taxable rental income each year.
• Depreciation recapture: When you sell a property, the IRS requires you to pay taxes on the total amount of depreciation you were allowed to take, even if you didn’t actually claim it. This is known as depreciation recapture, and it’s taxed separately from capital gains.

How to Calculate Rental Property Depreciation

Calculating how much depreciation you can deduct each year isn’t as complicated as it might seem. Once you know the numbers the IRS uses to calculate depreciation, it’s just a matter of plugging them into the formula.

The basic depreciation formula

To calculate your annual depreciation deduction, use this formula:

(Cost basis – Land value) ÷ 39 = Annual depreciation deduction

This gives you the amount you can deduct from your taxable rental income each year for 39 years.

Now, let’s break down each part of the formula so you can apply it to your own property.

1. Determine your cost basis

The cost basis is the IRS’s starting point for calculating how much of your property’s value can be depreciated. It includes more than just what you paid for the property.

You can include:

• Purchase price: The amount you paid to buy the property.
• Eligible closing costs: Fees like title insurance, deed recording, and attorney fees (but not loan-related costs like points or prepaid interest).
• Capital improvements made before renting: These are major upgrades that add value or extend the property's life, like a new roof, HVAC system, or kitchen renovation.

Example
You buy a property for $250,000, pay $5,000 in closing costs, and spend $20,000 on pre-rental improvements.

Your cost basis = $250,000 + $5,000 + $20,000 = $275,000

2. Subtract the land value

You can’t depreciate land, because it doesn’t wear out. You’ll need to subtract the value of the land from your total cost basis.

Land value is usually listed separately on your county tax assessment or appraisal report. If it's not provided, you may need to work with a tax professional to estimate it.

Example

If the land is valued at $50,000, then:
$275,000 – $50,000 = $225,000 depreciable basis

3. Divide by 39

Once you know your depreciable basis (the cost of the building and improvements, excluding land), divide it by 39 to get your annual deduction.

Example
$225,000 ÷ 39=  $5,769

That’s how much you can deduct from your rental income every year, regardless of whether you paid for a new roof or not in that particular year.

Adjusting your cost basis over time

Your cost basis is the starting number you use to calculate depreciation. It includes the purchase price, certain closing costs, and pre-rental improvements, minus the land value (which can’t be depreciated).

However, that number doesn’t stay fixed forever. Over time, your cost basis can change based on two main things:

• Depreciation you’ve already claimed: Each year, the value of the building goes down for tax purposes, because you're “using it up.”
• Capital improvements: If you make major upgrades (like installing a new roof, HVAC system, or kitchen), you add those costs to your basis.

This new, updated number is called your adjusted cost basis. It’s not something you file with the IRS each year, but it’s critical to track it for your own records, especially when you sell the property (to calculate capital gains and depreciation recapture), or you add new improvements and want to deduct them properly.

Let’s say you buy a rental property for $300,000. The land is worth $50,000, so your depreciable basis is $250,000.

You depreciate it over 39 years: $250,000 ÷ 39 = $5,769 per year

In Year 3, you install a new HVAC system for $10,000.

Now your depreciation looks like this:

• You continue claiming $5,769/year for the original building
• Plus, you start depreciating the $10,000 HVAC (usually over 15 years, or possibly all at once with bonus depreciation)

So your total depreciation for the year increases, but your original building deduction stays the same.

Even though you don’t submit your adjusted cost basis to the IRS every year, keeping accurate records is essential.

You’ll need this information when you sell, calculate depreciation recapture, or file deductions for improvements. Without it, you could miss out on tax savings — or worse, overpay when it’s time to settle up with the IRS.

Rental Property Depreciation Methods and Schedules

Once you’ve figured out your property’s depreciable value, there’s still one more decision and IRS rule you’ll need to follow: how your depreciation is scheduled.

This matters because it affects how much you can deduct each year, and how long those deductions last. The IRS offers two main systems for calculating depreciation: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Each one follows different rules about how fast you can deduct your expenses.

In most cases, the method you’ll use is already determined by the IRS. However, knowing which one applies and why helps you understand what to expect and how to plan for tax time.

General Depreciation System (GDS)

This is the default and most common method used for residential rental properties in the U.S. It allows you to recover the cost of your building over time in a steady, predictable way.

• Recovery period: 39 years for short-term rentals and 27.5 for everything else
• Method: Usually straight-line depreciation under MACRS (Modified Accelerated Cost Recovery System), which means you deduct the same dollar amount each year for the building’s original depreciable value, unless you add new improvements later.
• Mid-month convention: Your first year’s depreciation is prorated because the IRS treats the property as being placed in service at the middle of the month, regardless of the exact day

GDS gives you consistent, moderate-sized deductions year after year. It’s simple to apply and widely used.

Alternative Depreciation System (ADS)

ADS is a slower method with a longer depreciation schedule:

• Recovery period: 40 years for residential property
• Method: Straight-line only (no acceleration)
• Downside: The deductions are spread out more thinly, so your annual tax savings are smaller

You’ll only need to use it in special situations, like:

• The property is used mostly outside the U.S.
• It’s considered tax-exempt use property
• You elect to use ADS, sometimes done for long-term tax planning.

If you’re required to use ADS (or choose to), you’ll get less depreciation each year. That might be fine for long-term planning, but it’s something to factor into your financial forecasts.

Here’s one final rule that applies no matter which method you’re using: You can’t depreciate the land . . . only the building and qualifying improvements. Be sure you’ve subtracted land value from your cost basis before starting any depreciation schedule.

What Is Bonus Depreciation and How Is It Different?

While regular depreciation spreads out deductions over many years, bonus depreciation lets you write off the entire cost of certain assets in the year you buy and place them in service. It’s a way to accelerate your tax savings and lower your taxable rental income much faster, potentially freeing up more cash in the early years of owning or updating a property.

Bonus depreciation applies only to specific types of property: namely, items that have a useful life of 20 years or less. That includes things like appliances, furniture, HVAC systems, and flooring. It does not apply to the building itself or the land.

This deduction can be used by both long-term and short-term rental property owners, as long as the rental activity qualifies as a business (which it usually does if you actively manage the property). For the asset to qualify, it must be new to you and placed in service, meaning ready and available for rental use, in the same year you claim the deduction.

If you’re furnishing a new short-term rental, replacing aging appliances in a long-term unit, or updating major systems like heating or air conditioning, bonus depreciation allows you to recover those costs right away instead of waiting five, seven, or even 15 years.

That kind of upfront tax break can make a real difference in the early stages of owning or scaling a rental property.

2025 update: 100% bonus depreciation is back

For a few years, bonus depreciation was phasing out. After 2022, the maximum deduction percentage started dropping: from 100% to 80% in 2023, then 60% in 2024.

However, the 2025 One Big Beautiful Bill Act (OBBBA) changed that. It brings back 100% bonus depreciation for qualifying property placed in service after January 19, 2025.

Bonus depreciation is a powerful tool for improving cash flow, especially when paired with strategies like cost segregation that help identify more assets that qualify.

Cost Segregation Studies and Rental Property Depreciation

Depreciation is already a smart way to reduce your rental property's taxable income, but what if you could unlock even more of those deductions upfront?

That’s where cost segregation comes in. It’s a strategy you can use, usually with the help of a tax pro or engineer, to break your property into its individual parts. That way, you don’t have to treat everything like it wears out at the same pace. Let’s face it: your roof isn’t aging like your refrigerator.

With cost segregation, you separate qualifying items like flooring, lighting, appliances, and landscaping from the structure of the building itself. Instead of depreciating the entire property over 39 years, you can depreciate these components over much shorter timelines: 5, 7, or 15 years, depending on the asset.

Here’s why it matters:

• Faster depreciation = bigger deductions sooner
• You improve cash flow in the early years of ownership or renovation
• It works with regular depreciation and pairs especially well with bonus depreciation (for even more upfront savings)

Cost segregation helps you match your tax deductions to how your property actually wears down, making your depreciation strategy more accurate and more efficient.

Even if you don’t spring for a full cost segregation study, understanding the concept helps you work with your tax pro to identify faster-depreciating assets when you buy, renovate, or furnish a rental, whether it’s long-term or short-term.

Claiming Rental Property Depreciation on Taxes

Depreciation can significantly reduce your taxable income, but only if it’s reported correctly.

Each year, you’ll need to complete IRS Form 4562 to claim depreciation. This form documents how much you’re deducting and the method you're using. Key details include the date the property was placed in service, its cost basis, and whether you're using bonus depreciation.

Once filled out, your depreciation expense gets reported on Schedule E (Form 1040), alongside your rental income and other expenses.

One final note: When you eventually sell the property, the IRS requires depreciation recapture, meaning you'll owe tax on all the depreciation you took (or could have taken) during ownership. This applies even if you never actually claimed the deduction. 

Still unsure how to apply depreciation to your specific property? Consult a qualified tax professional to maximize your deductions and stay compliant with IRS rules.

What to know about depreciation recapture

Depreciation is a powerful way to reduce your taxable income while you own a rental property, but the IRS doesn’t let those tax savings go permanently untaxed.

When you sell the property, the IRS requires you to “recapture” the depreciation you claimed (or could have claimed) over the years. This means you’ll owe taxes on the total amount of depreciation deductions allowed or allowable, regardless of whether you actually claimed them.

This is known as depreciation recapture, and it’s taxed at a maximum rate of 25% under the federal unrecaptured Section 1250 gain rules. It only applies to the portion of your gain related to depreciation, not your entire profit or sale price.

Important: Even if you didn’t claim depreciation, the IRS still reduces your cost basis as if you did. So skipping depreciation doesn’t save you. It just means you miss out on years of tax savings but you’ll  still owe taxes at sale.

Think of depreciation like a tax deferral, not a permanent discount:

• You pay less tax each year while you own the property
• Then pay part of that back later when you sell

The good news? For most rental owners, the annual tax savings far outweigh the recapture owed later. Still, it’s smart to plan ahead, especially if you’re considering a sale or a 1031 exchange, which may allow you to defer the recapture further.

How Rental Property Depreciation Works for STRs

If your short-term rental (STR) property is rented for less than 30 days at a time, and you actively manage it (think guest communication, cleaning, and maintenance), the IRS may treat your short-term rental like a business rather than a passive investment. That classification opens the door to larger and faster deductions, even if you don’t qualify as a real estate professional.

This unique treatment, often referred to as the short-term rental tax loophole, can give STR owners a leg up when it comes to claiming depreciation and other tax benefits. For example, you may be able to deduct rental losses against your regular income, something long-term landlords often can’t do without meeting stricter IRS criteria.

The takeaway? With the right setup and active involvement, short-term rental depreciation can significantly lower your tax burden, making your investment more profitable without spending more out of pocket.

Short-Term vs. Long-Term Rental Depreciation

Long-term rentals are usually more hands-off and treated as passive investments. You can still claim standard depreciation, and in some cases, bonus depreciation too, but only if your rental activity qualifies as a business (like if you’re a real estate professional). Since LTRs often involve less active involvement, owners usually don’t meet the IRS’s requirements to unlock those extra tax deductions.

Short-term rentals have a recovery period of 39 years since they’re used for commercial activity. Long-term rentals depreciate over the course of 27.5 years because the average tenant stay is 30 days or longer, making it a residential use according to the IRS.

STRs also tend to have more wear and tear due to frequent guests. That means more upgrades, which you can factor into your cost basis and possibly depreciate faster through strategies like cost segregation.

Both short- and long-term rentals qualify for standard depreciation. However, short-term rentals (when actively managed) can unlock even more powerful tax strategies. Understanding the differences helps you plan smarter, save more, and stay on the IRS’s good side.

Frequently Asked Questions

What is depreciation in real estate?

Depreciation is a tax deduction that lets you recover the cost of buying and improving a rental property over time. It reflects the idea that buildings wear out or become outdated, even if they’re gaining market value.

How do you calculate depreciation on a rental property?

To calculate depreciation, take your cost basis (purchase price + eligible closing costs + improvements), subtract the land value, then divide the result by 39 years. Use 39 years for commercial property (short-term rentals) and 29 years for residential properties (long-term rentals). That gives you the annual amount you can deduct.

How much depreciation can you claim on a rental property?

It depends on your cost basis after removing the land value. For example, if $275,000 of a $300,000 property is depreciable, you'd claim $275,000 ÷ 39 = about $7,000 per year.

Is the depreciation period 27.5 or 39 years?

It depends on how the IRS classifies your property:

• 27.5 years applies to residential rental properties, like single-family homes, apartments, and long-term rentals used primarily for living accommodations.
• 39 years applies to commercial properties, such as office buildings, retail spaces, or warehouses. Short-term rentals are treated like hotels or motels and fall within this category as well.

The IRS sets these depreciation periods under the General Depreciation System (GDS), which is the most commonly used method. If you're renting to individuals for living purposes, the average stay must be 30 days or longer for it to qualify as residential and follow the 27.5-year schedule.

What happens if I don’t claim depreciation?

Even if you skip claiming depreciation, the IRS treats it as if you did. That means when you sell the property, you’ll still owe depreciation recapture tax (usually up to 25%) on the amount you could have deducted. If you don’t claim it, you lose the yearly tax savings but still owe the taxes later. That’s why it’s important to track and report depreciation correctly, even if you don’t think you need it right now.

What is the downside of depreciation rental property?

The biggest downside comes when you sell. The IRS requires you to pay recapture tax on the depreciation you’ve claimed (or were allowed to claim), which is usually taxed at up to 25%. If you haven’t planned for it, this can reduce your profit from the sale.

Another risk is not keeping good records. If you don’t track your cost basis and improvements accurately, you could end up paying more tax than you need to or face IRS issues.

Still, most investors find that the yearly tax savings outweigh the future recapture. If you're thinking long term, strategies like a 1031 exchange can help delay or reduce the tax hit when you sell.

Can I claim depreciation on a short-term rental?

Yes, as long as the property is used to produce income and you meet IRS requirements. Short-term rentals may even qualify for bonus depreciation or additional tax benefits if you actively manage the property.

Are there any special depreciation rules or loopholes for short-term rentals?

Yes, and we have a guide dedicated to this subject: How to Leverage the Short-Term Rental Tax Loophole to Reduce Your Tax Burden.

Short-term rentals might qualify for bonus depreciation or Section 179 expensing, which allows you to deduct the full cost of new furniture in the year you buy it. Both of these strategies allow for the immediate deduction of certain expenses. Keeping up with legislative changes and IRS updates is vital. Consult a qualified tax accountant to help navigate these complexities.

Can you take bonus depreciation on rental property in 2025?

Yes, and the 2025 One Big Beautiful Bill Act (OBBBA) has made this even more attractive. OBBBA reintroduced 100% bonus depreciation for qualifying new and used property placed in service after January 19, 2025. This means you can immediately deduct the full cost of eligible assets, like appliances, furniture, HVAC systems, and certain building components, rather than spreading deductions over multiple years. 

When paired with a cost segregation study, this can create substantial upfront tax savings for short-term rental owners. Keep in mind that bonus depreciation applies to tangible personal property and qualified improvement property, not the building structure itself.