Depreciation is the rental deduction that trips up first-time landlords, because no money moves when you take it. The tax rules treat a rental building as something that wears out, and let you deduct part of its cost every year you rent it out.
That one deduction is often the difference between a house that looks profitable on the tax return and one that looks like a loss.
What is rental property depreciation?
Depreciation spreads the cost of a rental building across the years you own it. Each year you subtract a slice of that cost from your rental income, even though you paid the money once, at closing.
Residential rental property runs on a 27.5-year schedule under the system the IRS calls the General Depreciation System, using the straight line method, which means the same amount every full year (Publication 527, the edition for 2025 returns). Residential rental property means a building where 80% or more of the year’s gross rental income comes from dwelling units.
Two limits bite immediately. You cannot depreciate land, which Publication 527 states outright, and land is often a fifth or more of what you paid. And depreciation begins when the property is placed in service, which the publication describes as ready and available for a specific use, not when a tenant finally signs.
How much of the price can you depreciate?
The building’s share of your basis, and nothing else.
Basis starts with the purchase price, and some buying costs are added to it. Publication 527 lists abstract fees, legal fees, recording fees, surveys, transfer taxes and title insurance. It keeps other costs out, including loan points, lender-required appraisal fees and amounts put into escrow, so a closing statement is not a single number you can drop in whole.
Then you split that basis between land and building. Publication 527 says to divide the cost by the ratio of each part’s fair market value to the whole property’s value, and that you can use the assessed values your county uses for property tax if you do not know those values. Its own example splits a $200,000 purchase into $170,000 of house and $30,000 of land on that basis.
Take the rental calculator’s example house: $250,000, bought with closing costs of 3% of the price. The example assumes those buying costs all belong in basis, and that the county’s assessment puts 80% of the value in the building.
| Amount | |
|---|---|
| Building, 80% of basis | $206,000 |
| Land, 20% of basis | $51,500 |
| Total basis | $257,500 |
These are example figures, not a forecast for any market.
$206,000 over 27.5 years is $7,491 a year. That is 3.636% of the building, the full-year rate Publication 527 uses in its own worked examples.
What does depreciation do to the year’s numbers?
It splits what you bank from what you are taxed on, and the two stop matching in the first month.
The rental calculator works out cash flow before tax: rent, less the months the house sits empty, less running costs, less the whole mortgage payment. A tax return differs in two ways. Only the interest part of the mortgage is deductible, not the principal. And depreciation shows up even though no money left the account.
The example house rents for $2,750 a month with 5% held back for empty months, $3,000 of property tax, $1,400 of insurance, 10% of rent for repairs and big repairs, and 8% for a property manager, on a $200,000 loan at 7% over 30 years. It clears $420 a month, or $5,043 for the year. Here is that same year as the return sees it.
| Year one | |
|---|---|
| Rent after empty months | $31,350 |
| Running costs | −$10,340 |
| Mortgage interest | −$13,936 |
| Depreciation | −$7,491 |
| Taxable rental income | −$417 |
The house paid you $5,043 and reported a $417 loss. Depreciation did nearly all of that work: leave it out and the return shows $7,074 of income instead.
The $2,032 of principal you paid off in year one is not a deduction. It is the part of the payment that buys equity rather than pays for the year, which is why it sits in the cash flow figure and not in the table above.
When does the clock start, and how big is the first year?
The first year is a part year, and the rules decide how much of it you get.
Depreciation uses what the IRS calls a mid-month convention: the property counts as placed in service in the middle of whatever month it actually was. A building that goes into service in February gets 3.182% that year rather than 3.636%, a rate Publication 527 applies to a $160,000 building for a $5,091 deduction. Start in August and it is 1.364%.
So treat the $7,491 as a full year. Unless you were renting from January, year one is smaller, and the schedule runs 27.5 years from there. It ends when you have recovered the cost or when you retire the property from service, whichever comes first.
What depreciation does not do
It does not cut your tax bill by $7,491. It cuts taxable rental income by $7,491, and what that saves depends on your own rate.
It is also not free in the long run. Depreciation lowers your basis, the figure a gain is measured from when you sell, so a deduction taken now reappears in the arithmetic of the sale. Renting your house out or selling it covers how that lands against the home sale exclusion.
A paper loss is not automatically deductible against your salary either. Separate rules on passive losses can limit how much of a rental loss you use in the year you have it. Your filing status, your income and how involved you are in the property all feed into that, so a tax professional is the person to ask about your own return.
Note what the calculators do not try to do. None of them carries a depreciation or income tax line, so the cash flow and NOI they produce are the inputs to the table above, not the answer to it.
Where to start on a house you are considering
Look up the county’s assessment for the address and note how it splits the value between land and improvements. That single ratio sets the size of every depreciation deduction the house will ever give you, and it is public before you make an offer.
Run the pre-tax numbers, then hand both the assessment split and those numbers to whoever prepares your return.