About Residential Rental Property Depreciation

The IRS allows you to depreciate residential rental property over 27.5 years using the straight-line method. This is a valuable tax deduction that reduces your taxable rental income each year.

What Can Be Depreciated?

Depreciable: Buildings, structures, and improvements (anything permanently attached to the property).

Not Depreciable: Land. The IRS considers land to have an indefinite useful life, so it cannot be depreciated. Typically, land represents 15-25% of the total purchase price, though this varies by location.

How Depreciation Works

The depreciable basis is calculated by subtracting the land value from your total purchase price. This basis is then divided by 27.5 years to determine your annual depreciation deduction.

Example: If you purchased a rental property for $300,000 and the land is valued at $60,000, your depreciable basis is $240,000. Your annual depreciation deduction would be $240,000 ÷ 27.5 = $8,727.27.

Tax Benefits

Depreciation is a non-cash expense that reduces your taxable rental income. Even though you're not spending money each year, you still get to deduct the depreciation amount. This can significantly reduce or even eliminate taxes on your rental income.

Schedule E Reporting

Report your annual depreciation on IRS Form 1040, Schedule E, Line 18. ManorKeeper's accounting system already tracks the "Depreciation" category aligned with Schedule E Line 18 to make tax time easier.

Important Considerations

Depreciation Recapture: When you sell the property, the IRS will "recapture" the depreciation you claimed and tax it at a rate up to 25% (plus state taxes).
Land Valuation: Use your property tax assessment or hire an appraiser to determine the land-to-building ratio. County assessor records often separate land and improvement values.
Partial Year: In your first year of service, you may only claim a partial year's depreciation based on the month you placed the property in service.
Cost Segregation: For larger properties, consider a cost segregation study to accelerate depreciation on certain components (consult a tax professional).

Disclaimer: This calculator provides general guidance only. Consult with a qualified tax professional or CPA for advice specific to your situation. Tax laws change, and individual circumstances vary.