How to calculate depreciation on rental property
Residential rental property must be depreciated with the straight-line method and the mid-month convention over a 27.5-year recovery period under the general depreciation system.[1]
- Start with the cost basis: the purchase price plus settlement costs such as title and recording fees.[3]
- Take out the land. Land is not depreciable, because it does not wear out or get used up.[1] Allocate the price between land and building, often in the same proportion as the property tax assessment.
- Divide the building basis by 27.5 for a full year's deduction.[2]
- Prorate the first year by month. Under the mid-month convention, property is treated as placed in service in the middle of its month.
Example: $360,000 + $7,000 − $72,000 of land = $295,000 of building basis. $295,000 ÷ 27.5 = $10,727 a year. Placed in service in April, the first year counts 8.5 months: $10,727 × 8.5 ÷ 12 = $7,598.
First-year percentage by month placed in service
The first-year deduction depends only on the month the rental was placed in service.
| Month | First-year % | On $100,000 of basis |
|---|---|---|
| January | 3.485% | $3,485 |
| February | 3.182% | $3,182 |
| March | 2.879% | $2,879 |
| April | 2.576% | $2,576 |
| May | 2.273% | $2,273 |
| June | 1.970% | $1,970 |
| July | 1.667% | $1,667 |
| August | 1.364% | $1,364 |
| September | 1.061% | $1,061 |
| October | 0.758% | $758 |
| November | 0.455% | $455 |
| December | 0.152% | $152 |
These percentages follow from the mid-month rule: (12 − month + 0.5) ÷ 12 × 3.636%. Every later full year is 3.636%, and the remainder falls in year 28 or 29.
When depreciation starts and stops
- Starts when the property is placed in service: ready and available for rent, not when it is bought or first rented.[1]
- Improvements made later, such as a new roof, are depreciated separately from the month they are placed in service. Repairs that only keep the property in working order are deducted in the year paid.[1]
- Stops when the basis is fully recovered or the property is sold or taken out of service.
Depreciation and the sale
Depreciation lowers taxable rental income every year, but it also lowers the property's adjusted basis.[3] When you sell, the gain equal to the depreciation is unrecaptured section 1250 gain, taxed at up to 25%.[4] Basis is reduced by depreciation "allowed or allowable", so skipping the deduction does not avoid that tax. And the home-sale exclusion never covers the gain from depreciation on a property you rented out.[5] The tax on sale of rental property calculator estimates it.
Other countriesCanada uses capital cost allowance classes rather than a 27.5-year life, and CCA cannot create or increase a rental loss.[6] The UK and Australia have their own rules; this worksheet applies only the U.S. rule.
See how depreciation turns cash flow into taxable income on the rental income calculator, and how it fits into the whole return on the investment property calculator.
Frequently asked questions
How do you calculate depreciation on a rental property?
Subtract the land value from your cost basis (price plus buying costs), divide by 27.5 for a full year, and prorate the first year by the month the rental was placed in service.
Is rental property depreciation 27.5 or 39 years?
Residential rental property uses 27.5 years under the general depreciation system. The alternative depreciation system uses 30 years for property placed in service after 2017.
Can you depreciate land?
No. Only the building and improvements are depreciated; land does not wear out.
What happens to depreciation when I sell?
It reduces your adjusted basis, which increases the gain. The part of the gain from depreciation is taxed at up to 25% as unrecaptured section 1250 gain.