How Rental Property Depreciation Works, in Plain English

Depreciation is usually the largest deduction on a rental, and it's the one that makes least intuitive sense — you're claiming a cost you never paid, on a property that's probably gone up in value.

Here's what's actually happening.

The idea

The tax system treats a building as something that wears out. Rather than letting you deduct the purchase price all at once, it lets you write off a slice each year across its assumed useful life — 27.5 years for residential rental property.

You claim that slice every year whether or not anything wore out, and whether or not the property is worth more than you paid. It's a rule, not an observation.

The three things that decide your figure

How much of the price is building, not land. Land never depreciates, so it comes out first. Getting this split right matters — it's the single biggest lever on your annual deduction, and it's the one most often guessed at. We cover it in land vs building.

What the starting figure is. For a straightforward purchase it's what you paid, plus certain buying costs. If the property used to be your home, the starting figure follows a different rule — broadly the lower of what you paid or what it was worth when it became a rental, which surprises people.

When it was ready to rent. The clock starts when the property is placed in service — ready and available for rent — not when you bought it and not when a tenant moves in.

The part nobody mentions until it's too late

Depreciation isn't free. When you sell, the tax is calculated as though you'd claimed it — and the portion of your gain created by depreciation is taxed at up to 25% rather than the friendlier capital gains rate.

The sting is in the phrase "as though you'd claimed it". If you never took the deduction, you're still treated as having done so. Which means not claiming depreciation isn't a way to avoid the bill later — it's a way to pay it without ever getting the benefit.

We go through that in what depreciation recapture costs when you sell.

If you haven't been claiming it

This is common, particularly among people who became landlords by accident. It's fixable, and generally worth fixing before you sell rather than after.

Our missed depreciation calculator shows roughly what's sitting there uncollected. It takes a couple of minutes and there's no sign-up.

The correction itself is a formal filing rather than a box you tick, so it's worth having someone do it properly. You can ask to be introduced to a specialist in your state — no commitment or fee required.