Does Rental Property Have to Be Depreciated? + FAQs

Yes. Under U.S. tax law, a rental property must be depreciated if it’s used for income – depreciation isn’t optional.

In fact, the IRS will pretend you took depreciation (even if you didn’t) when you sell, so skipping it only creates tax trouble later. Over 10 million Americans own rental properties, and each of them is expected to follow strict IRS depreciation rules.

This comprehensive guide breaks down those rules and answers every question about rental property depreciation in the U.S. – from federal law to state twists, from common mistakes to tax court cases. By the end, you’ll know exactly why depreciation is mandatory and how to make the most of it.

🏷️ IRS Rules Made Simple: The IRS requires depreciation on rental buildings (27.5-year rule for homes) and will recapture it later – learn why you can’t opt out of this tax rule.
⚠️ Avoid Depreciation Pitfalls: Common landlord mistakes (like forgetting to separate land value or not claiming depreciation at all) and how to dodge IRS penalties and costly errors.
🏠 Residential vs. Commercial: How residential rentals (27.5-year) differ from commercial properties (39-year), why land isn’t depreciable, and special cases like short-term rentals and value vs. cost basis.
⚖️ Real Cases & Court Rulings: Eye-opening real-world examples and key Tax Court decisions that show what happens if you ignore depreciation, and how the law enforces these rules (yes, even in court!).
💡 Quick FAQs Answered: Concise yes/no answers to the most-asked questions from landlords (e.g. “What if I never took depreciation?” or “Can I catch up later?”) so you’re never left guessing.

📜 Why Rental Property Depreciation Is (Virtually) Mandatory

Does a rental property have to be depreciated? Yes – basically every rental building in the U.S. must be depreciated for tax purposes. The IRS considers depreciation a “reasonable allowance” for wear-and-tear on any property used to produce income. If you own a house or building that you rent out, you must depreciate the building’s cost over time (currently 27.5 years for residential rentals and 39 years for most commercial rentals). Even if you decide not to claim depreciation on your tax return, the IRS will act as if you did when you sell the property. This means depreciation is effectively not optional:

Allowed or allowable: Tax law uses the concept of “allowed or allowable” depreciation. That means when you sell, the IRS subtracts the depreciation you were entitled to take (whether or not you actually took it) from your property’s basis. In other words, you don’t get to skip depreciation to avoid taxes – you’ll face the same tax bill later as if you had taken it!
Depreciation recapture: If you sell a rental, the IRS will levy a depreciation recapture tax on the gain attributed to all the depreciation you claimed or could have claimed during ownership. This recapture is taxed at up to 25% (the special capital gains rate for unrecaptured Section 1250 gain). For example, if you could have taken $50,000 in depreciation but didn’t, the IRS will still charge you tax on that $50,000 at sale. You gain nothing by skipping the depreciation deduction – in fact, you end up paying tax without ever getting the yearly benefits.
It’s the law: The requirement to account for depreciation is baked into federal law (Internal Revenue Code §§ 167 and 168). The IRS expects rental owners to use the MACRS system (Modified Accelerated Cost Recovery System) to depreciate rental property. Under MACRS, residential rental buildings are depreciated on a straight-line basis over 27.5 years (39 years if non-residential), using a mid-month convention (meaning depreciation for the first and last year is prorated based on the month placed in service).

In short, if your property is used for rental income, depreciation isn’t just a suggestion – it’s effectively a requirement. The IRS will get its share of that depreciation eventually, so you’re expected to take the deduction annually as you go.

What Properties Must Be Depreciated?

Not every asset is depreciable, but rental real estate almost always is. Key conditions and exceptions include:

Use for income: The property must be used for business or income production (e.g. renting to tenants). Your personal residence isn’t depreciated, but a house, condo, or building you rent out does qualify. You start depreciating when the property is “placed in service” (when it’s ready and available to rent, even if not yet rented).
Useful life > 1 year: The property should have a determinable useful life longer than one year. Buildings certainly qualify (they wear out over decades). Items with shorter lives (like appliances or furniture in a rental) are depreciated over their own lifespans (5 or 7 years, etc.). If something doesn’t wear out (land), it’s not depreciable (more on land vs. building later).
Ownership: You must own the property to depreciate it. If you lease property from someone else, you generally can’t depreciate it (though leasehold improvements you pay for can be depreciated).
Land is excluded: Only the building and improvements are depreciated, not the land itself since land doesn’t wear out. We’ll discuss allocating land vs. structure value below, but this is a crucial point: when you buy a rental property, you must separate the land’s value (non-depreciable) from the building (depreciable).

By law, if these conditions are met, you are entitled to depreciation deductions – and the IRS assumes you take them. In fact, the tax code will penalize you for not taking depreciation by still charging you for it later (via reduced basis and recapture tax). So yes, you have to depreciate your rental property in practical terms. Failing to do so only defers the paperwork while forfeiting the benefit.

What If I Don’t Depreciate It?

Some landlords think they can avoid taxes by not depreciating, but this is a dangerous misconception. If you don’t depreciate your rental property each year, two things happen:

You lose the yearly tax benefit. Depreciation is a valuable deduction that can offset your rental income (often creating or increasing a loss on paper, which might be used to offset other income depending on your situation). By not claiming it, you’re voluntarily paying more tax each year than required, reducing your cash flow.
You still owe recapture tax later. When you sell, the IRS will calculate your gain as if you had depreciated the property. This means your taxable gain will be higher (because your basis was silently reduced by the “allowable” depreciation). You’ll then owe depreciation recapture tax (25%) on that amount. Essentially, you pay tax for deductions you never took. This is truly the worst of both worlds.

Example: Suppose you bought a rental property for $300,000 (with $240,000 allocated to the building after removing land value). Roughly, you could depreciate about $8,727 per year ($240k/27.5). Over 5 years, that’s ~$43,635 of depreciation. If you skip claiming it, you miss out on over $43k of deductions (maybe ~$10k+ in tax savings if you’re in a moderate tax bracket). Now you sell the property after 5 years for $350,000. Because you didn’t claim depreciation, you might hope to be taxed only on a $50k gain ($350k minus $300k basis). Not so – the IRS will reduce your basis by the $43,635 of allowable depreciation, so your adjusted basis is ~$256,365. Your taxable gain becomes ~$93,635, and the first $43,635 of that is subject to 25% recapture tax (about $10,909 in tax), with the remaining $50k taxed at long-term capital gains rates. End result: by not depreciating, you still pay the $10.9k depreciation tax and lost the ~$10k you could have saved earlier. Ouch. Clearly, not depreciating is a costly mistake.

The bottom line: Always take your depreciation deductions on a rental property. The tax law expects it, and if you don’t, you’ll pay extra taxes for no reason. There is even a procedure to “catch up” missed depreciation if you failed to claim it in previous years (we’ll cover that in Common Mistakes below), but it’s better to do it right from the start. Depreciation is your friend – embrace it!

🚫 Common Depreciation Mistakes to Avoid

Depreciating a rental property isn’t rocket science, but there are some common mistakes and misconceptions that trip up landlords. Avoid these pitfalls to save money and stay compliant:

1. Not Claiming Depreciation (or Delaying It) – Some landlords simply don’t depreciate their property, either from fear of complexity or hoping to avoid recapture. This is, as explained, a big mistake. Failing to claim depreciation is like leaving free money on the table each year, and it won’t save you from taxes in the end. Solution: Always claim your depreciation annually. If you forgot in past years, you can file a one-time accounting method change (Form 3115) to catch up missed depreciation in the current year. The IRS allows you to recoup previously unclaimed depreciation with this adjustment, rather than amending multiple returns. Don’t just continue not depreciating – fix it and start claiming what you’re entitled to.

2. Mixing Up Land vs. Building Value – When you purchase a property, you must allocate the cost between land (non-depreciable) and building (depreciable). A common error is to either depreciate the entire purchase price (wrong – you can’t include land), or use a wrong split of land vs building. Over-allocating to land means you’ll depreciate too little; under-allocating (assigning too much to building) means you’re depreciating land by mistake (which could be challenged by the IRS). Solution: Use a reasonable method to allocate value. Often the county property tax assessment or an appraisal will state land vs improvement values. For example, if an appraisal says the land is 20% of the value and building 80%, apply those percentages to your purchase price. Document how you arrived at the allocation. Then depreciate only the building portion.

3. Incorrect Basis or Cost Adjustments – “Basis” is the starting value for depreciation (typically the purchase price plus certain buying costs like legal fees or transfer taxes). A mistake is forgetting to include allowable costs in the basis (e.g. capital improvements made before putting the property in service, or closing costs that should be capitalized). Conversely, some might inflate basis improperly. Also, once depreciation starts, your adjusted basis should be reduced each year by the depreciation taken. Failing to adjust basis (especially when computing gain on sale) is an error. Solution: Carefully calculate your initial basis: include the purchase price and settlement costs that must be capitalized (not expenses like routine repairs, but things like title fees). Also, whenever you make capital improvements (new roof, addition, significant upgrades that extend the property’s life or value), add those costs to your basis and depreciate the improvement (usually as a separate asset with its own 27.5-year life if it’s part of the structure). Keep a depreciation schedule to track annual depreciation and the remaining basis. At sale time, remember your basis is original basis + improvements – depreciation allowed or allowable.

4. Using the Wrong Recovery Period or Method – Rental real estate should be depreciated using straight-line depreciation over the correct recovery period (27.5 years for residential rental property, 39 years for non-residential). Mistakes can happen if someone uses an accelerated method or the wrong life (for instance, treating a rental house as 39-year property, or vice versa). Using accelerated depreciation on the building (like 200% declining balance) is not permitted under MACRS for real property (real estate is required to use straight-line). Solution: Know your property type. If it’s residential rental property (defined by the IRS as a building where 80%+ of gross rental income comes from dwelling units rented for residential use, not on a transient basis), use 27.5-year straight-line depreciation. If it’s commercial/non-residential (e.g. an office, or a short-term rental property that doesn’t qualify as residential under the IRS definition), use 39-year straight-line. Use the General Depreciation System (GDS) unless required to use ADS (Alternative Depreciation System) in special cases. Most tax software will handle this if you input the correct property type and in-service date. Don’t “speed up” real estate depreciation beyond what’s allowed – the IRS will catch it (and disallow the excess, plus penalties).

5. Capital vs. Repair Confusion – Another common pitfall is misunderstanding what must be depreciated (capitalized) versus what can be expensed immediately. Major improvements must be depreciated, not deducted all at once. For example, if you replace the entire roof or add a new room, that’s a capital improvement (increase the property’s basis and depreciate it over 27.5 years). Some landlords erroneously expense such costs, which can lead to trouble in an audit. On the flip side, purely repair or maintenance costs (fixing a leak, painting, minor fixes) can be deducted immediately and should not be added to basis or depreciated. Solution: Learn the difference between improvements (depreciate) and repairs (expense). The IRS has detailed rules (including the safe harbor for repairs and de minimis safe harbor for small expenses). When in doubt, consult a tax professional. Misclassifying an expense as a repair when it should be depreciated can result in the IRS disallowing that deduction until it’s properly depreciated.

6. Not Keeping Good Records – Depreciation spans many years, and properties often have multiple assets (building, appliance, improvements each with their own life). A mistake is failing to maintain a depreciation schedule and documentation for each asset. Years later, you might forget how much depreciation was taken or the basis of improvements, leading to errors when selling or making adjustments. Solution: Keep a detailed record: for each rental property, list the building, the date placed in service, original depreciable basis, depreciation taken each year, and any new assets or improvements (with their own cost and start date). Save receipts and documents for capital improvements. This will make preparing taxes (and eventual sale calculations) much easier and more accurate.

Avoiding these mistakes will ensure you maximize your tax benefits and stay on the right side of the IRS. Depreciation is powerful, but only if done correctly. If you’re ever unsure, seek advice from a CPA or use reputable tax software – the specifics can get tricky (especially with improvements or mixed-use properties), but help is available. In summary: depreciate every year, use the correct figures and methods, and keep track.

💡 Real-World Examples: Depreciation in Action

To truly understand the impact of depreciation, let’s look at some real-world scenarios and examples. These illustrate how depreciation (or the lack of it) affects a landlord’s taxes and finances.

Example 1: The Savvy Landlord vs. The Unaware Landlord

Scenario: Two investors, Alice and Bob, each buy a rental house for $300,000 in the same year. Each allocates $60,000 to land and $240,000 to the building. They both rent their houses out for a few years and then sell for $350,000.

Alice (Depreciates Properly): Alice depreciates her $240,000 building basis over 27.5 years. Each year, she deducts about $8,727 in depreciation. Over 5 years, she claims ~$43,600 total depreciation, which shelters a good portion of her rental income from tax. When selling for $350k after 5 years, her adjusted basis is $300k (initial) – $43.6k (dep) = ~$256.4k. Her total gain is ~$93.6k. She’ll owe depreciation recapture tax on the $43.6k at 25% (≈ $10.9k), and long-term capital gains tax (15% assuming she’s in that bracket) on the remaining $50k gain (≈ $7.5k). Total tax on sale ≈ $18.4k. However, remember Alice enjoyed $43.6k of deductions over the years. If she was in the 24% tax bracket, those deductions saved her roughly $10.5k in taxes during ownership. Net effect: she deferred a chunk of tax via depreciation and when she sold, part of her gain was taxed at the favorable 25% rate. She also had use of the tax savings in the interim. Alice could even choose to do a 1031 exchange to defer the recapture and capital gain further by buying another property, or hold the property until death (letting her heirs get a stepped-up basis, wiping out the deferred tax entirely – the ultimate tax win).
Bob (Fails to Depreciate): Bob, unfortunately, never bothered with depreciation – he thought it was too complicated or wanted to avoid the “depreciation recapture tax.” During the 5 years, he received no depreciation deductions, so he paid more tax on his rental income each year than Alice did. When Bob sells for $350k, the IRS still reduces his basis by the depreciation he should have taken (~$43.6k). Just like Alice, his adjusted basis is ~$256.4k and gain is ~$93.6k. Bob owes the exact same $10.9k recapture tax and ~$7.5k capital gains tax as Alice. But unlike Alice, Bob got zero benefit beforehand – he paid perhaps $10k extra in taxes during the years (since he didn’t deduct depreciation). Bob essentially paid tax twice on the same $43.6k (once by not deducting it, and again via recapture)! He gained no advantage from skipping depreciation; in fact, he’s worse off by roughly $10k in this scenario. Bob learned the hard way that depreciation isn’t optional – the IRS makes you pay as if you took it, so you’re foolish not to actually take it.

This example highlights why taking depreciation is crucial. Alice’s scenario also shows that, although you do pay recapture tax, the benefits of depreciation usually outweigh it – especially if you hold the property for several years or use strategies like exchanges or stepping up basis.

Example 2: Cost Segregation – Accelerating Depreciation

Scenario: Carol buys a small apartment building (residential, so 27.5-year property) for $1,000,000. After allocating $200k to land, her building basis is $800k. Normally, straight-line depreciation yields about $29,090 per year. However, Carol engages a cost segregation study – engineers break down the property into components. They find $100k of the cost is in appliances, carpeting, and fixtures that qualify as 5-year or 7-year property, and another $50k in land improvements (15-year property). Under current tax law, many of those shorter-life assets can even qualify for bonus depreciation (which in 2024 is 80%, phasing down each year).

Carol’s accelerated approach: In Year 1, Carol uses bonus depreciation on those components, maybe deducting an extra $120k (80% of $150k) immediately. Plus, she still depreciates the remaining building basis ($650k) over 27.5 years ($23.6k/year). So Year 1 depreciation could be ~$144k instead of $29k! This creates a huge paper loss that shelters her rental income (and possibly other passive income). Carol’s cash flow is untouched, but her taxes plummet. This is a savvy move for an investor who needs deductions now.
Trade-off: If Carol sells after a short time, all that accelerated depreciation will be subject to recapture (the 5-year/7-year assets at ordinary income rates up to 37% because they’re Section 1245, and the 27.5-year portion at 25%). However, Carol might plan to hold long-term or exchange into another property, deferring those taxes. Even if she sells, she benefited from the time value of money by taking deductions earlier. In contrast, if she didn’t do cost seg, she’d just take small even amounts each year.

This example shows one reason depreciation is designed the way it is: to allow real estate investors to recover costs over time, and even accelerate some of it. The tax code provides opportunities (like cost segregation, Section 179 for certain improvements, and bonus depreciation) to front-load deductions. These strategies have pros and cons (they’re more complex and can trigger larger recapture if you sell quickly), but they are legal and widely used to maximize the present value of tax savings.

Example 3: Mid-Life and Fully Depreciated Properties

Scenario: Dave has owned a small rental duplex for 28 years. He originally paid $200,000 (building $160k, land $40k). He’s been depreciating the $160k building over 27.5 years, so as of year 27.5 he has taken the full ~$160k in depreciation deductions (around $5,818/year). Now the property’s adjusted basis is just the land $40k (since the building basis is fully depreciated).

After 27.5 years: Dave can no longer take depreciation on the original building – it’s fully depreciated. His annual rental income now is fully taxable (aside from other expenses) since depreciation is zero. However, Dave’s cash flow is likely higher now (no mortgage maybe, and rents have increased). The property might have appreciated in market value significantly. If Dave continues to hold it, he just won’t get depreciation deductions anymore – the tax shelter effect is over for that original cost.
Selling a fully depreciated property: If Dave sells now, say for $500,000, his adjusted basis is $40k (land only), so his taxable gain is $460k. All $160k of the depreciation he took is subject to recapture at 25% (that’s $40k tax right off the bat on the depreciation portion), and the remaining $300k gain is taxed at long-term capital gains rates. The recapture portion hurts, but Dave did enjoy 27.5 years of lower taxes. Importantly, even if Dave hadn’t depreciated (imagine he did the unwise thing of not claiming it), his basis would still be $40k because of “allowable” depreciation, and he’d still face the same $40k recapture tax – with no deductions to show for the past decades. Clearly, not taking it would have been disastrous.
Renovating after fully depreciated: If Dave makes new capital improvements now (for example, he spends $100k to gut renovate the units), those improvements start a new depreciation cycle (likely 27.5-year for building improvements, or less if some components qualify differently). Even though the original building is depreciated, any new investment can be depreciated. This illustrates that while a building can become fully depreciated, you might reset some depreciation if you invest more into the property.

Real-world takeaway: Many long-time landlords end up with fully depreciated rentals. At that point, some consider selling (and paying recapture), exchanging, or just holding and leaving it in their estate for a step-up in basis. But everyone wishes they had depreciated – because it’s either use it or lose it. Depreciation gives you tax savings throughout the life of the property, and even though recapture reclaims some tax, it often is at a lower rate and deferred many years. As these scenarios show, depreciation is a powerful tax tool that you ignore at your peril.

Summary of Scenarios

To reinforce the lessons, here’s a quick comparison of three scenarios regarding depreciation decisions:

Depreciation Scenario	Outcome & Tax Impact
✅ Claim Depreciation (Proper Method) You depreciate the building every year as required.	You reduce taxable income each year (saving money annually). Your basis drops over time. On sale, you owe recapture tax (25%) on depreciation taken, but you benefited from those deductions. Overall, you deferred taxes and likely kept more cash in your pocket during ownership. If you hold long enough or use strategies (1031 exchange or die with the property for a step-up in basis), you can minimize or avoid the recapture cost entirely. Depreciation works as intended – a timing benefit for you.
🚫 Skip Depreciation (Incorrect Choice) You do not claim depreciation, hoping to avoid tax.	You lose out on yearly deductions, paying higher taxes while you own the property. Your property’s basis still reduces as if you took depreciation (IRS “allowable” rule). When you sell, you owe the same recapture tax as if you had depreciated, but without having received the benefits. This scenario is the worst financially: you pay taxes for nothing. The IRS effectively forces depreciation on the back end, so skipping it only harms you.
⏩ Accelerated/Bonus Depreciation You front-load depreciation via cost segregation or tax incentives.	You deduct larger amounts upfront (e.g. components on 5, 7, 15-year schedules or 100% bonus depreciation when available). This yields big early tax savings and can create rental losses (potentially usable to offset other income if rules allow). On sale, you’ll owe more recapture sooner (and some assets at higher ordinary rates if sold early), but you gained a time-value advantage. This strategy is great for high-income investors who need deductions now or those planning to hold long-term/ exchange. It requires careful planning and often professional help (cost seg study), but can significantly boost cash flow in the early years.

As the table shows, properly claiming depreciation is always beneficial or necessary. Not claiming it is a losing proposition. Accelerating depreciation can supercharge tax benefits if used wisely. Choose your depreciation strategy intentionally – but never choose to ignore depreciation.

⚖️ Tax Court Rulings & Law: What the Courts Say

Tax law around depreciation has been reinforced by courts over the years. Several notable rulings underscore that depreciation rules are to be taken seriously and that misconceptions won’t hold up if challenged. Here are a few key legal points and cases:

Cluck v. Commissioner (1995) – In Cluck, the Tax Court emphatically stated that a taxpayer must account for “allowed or allowable” depreciation in determining gain or loss. This case confirmed that even if you don’t claim depreciation, it’s still considered allowable and will be subtracted from your basis. The court held that a taxpayer could not avoid depreciation recapture by the simple expedient of not taking the depreciation. This precedent is often cited to shoot down the myth that skipping depreciation helps you at sale – it does not. Courts will enforce the IRS rule: depreciation allowed or allowable reduces your basis regardless.
Omission of Depreciation = Change in Accounting Method – Tax regulations treat not claiming depreciation as an impermissible accounting method. The IRS has procedures to correct this. In many cases, taxpayers who failed to depreciate for years have gone to court or IRS appeals seeking relief. The general resolution (not a specific single case, but through IRS Revenue Procedures) is that you must make a catch-up adjustment (often via Form 3115) to correct your error rather than continuing with no depreciation. The fact that this requires a formal change underscores that depreciation is the expected norm.
Smith v. Commissioner (2025) – A recent Tax Court memo (Smith, T.C. Memo 2025-24) highlighted the importance of substantiating your basis and depreciation especially for converted properties. In that case, a landlord who converted a personal home to a rental attempted to claim depreciation without solid evidence of his basis at conversion. The court denied the deduction because he couldn’t prove the correct basis (remember for conversions, the basis for depreciation is the lesser of cost or fair market value at time of conversion). The key lesson: if you want your depreciation deduction, you must prove your numbers (purchase price, allocated land value, etc.). The Tax Court will disallow depreciation if you can’t support the basis or if you use an improper value (like an inflated guess of FMV).
Depreciation Recapture Enforcement – Courts have consistently upheld the IRS’s calculation of gains including depreciation. In various cases, taxpayers argued against paying recapture on depreciation they never took or claimed they weren’t aware they needed to take. These arguments fail. The law (IRC §1250 and §1016) is clear: basis must be reduced by depreciation allowed or allowable. Even in scenarios like a home office deduction on a personal home, courts have reiterated that you must recapture depreciation (or reduce basis) on the business portion, regardless of whether it was claimed (there’s a famous IRS stance on this for home offices as well). Simply put, no court will let you off the hook for not depreciating.
State Court nuance: In some state tax disputes, the concept carries over. For instance, New Jersey’s Tax Court in Moroney v. Director, Div. of Taxation addressed basis for state tax purposes, and similarly, the idea of subtracting depreciation (per federal rules) was involved. The big picture is that state courts often follow the federal definitions of basis and depreciation when computing state tax (unless the state law diverges). So the “phantom depreciation” issue can hit you at the state level too if you’re not careful.
IRS Audits: While not a single court case, it’s worth noting the IRS audit perspective. Ironically, not claiming depreciation can raise eyebrows just as much as aggressive deductions. The IRS expects to see depreciation on a rental’s Schedule E. If it’s missing, it might prompt questions (why aren’t you depreciating? Did you improperly claim something as expense instead?). On the flip side, claiming it solidifies your basis adjustments. In an audit, if you claimed too little depreciation in prior years, the IRS can’t usually let you “go back” and claim more; they’ll stick with allowable rules. If you claimed too much (e.g. depreciating land or using wrong life), the IRS will correct and possibly penalize you. Bottom line: follow the rules and you’ll be fine – they are well established in law and precedent.

In summary, the courts have upheld the strict approach to depreciation: you must reduce basis for allowable depreciation no matter what. Ignorance is not a defense. They’ve also highlighted the importance of doing depreciation correctly (using the right basis, method, life). So when in doubt, follow the IRS guidelines to the letter – they have the force of law, and the courts will enforce them.

🏠💼 Residential vs. Commercial: Different Depreciation Rules

Not all rental properties are treated the same. The depreciation timeline differs depending on the type of property. It’s crucial to identify whether your rental is residential or non-residential (commercial) for depreciation purposes, as the rules and recovery periods change:

Residential Rental Property (27.5-Year Depreciation): This category covers most properties where people live as a residence. By IRS definition, a building is residential rental property if 80% or more of the gross rental income is from dwelling units used for living accommodations. Examples:

Single-family rental homes
Duplexes, triplexes
Apartment buildings
Residential condos or co-ops rented out

These properties are depreciated over 27.5 years (straight-line). The 27.5-year period reflects the IRS’s estimate of a typical useful life for housing.

Commercial & Non-Residential Property (39-Year Depreciation): If a property is not primarily residential, it falls under non-residential real property. Examples:

Office buildings, retail stores, warehouses
Industrial properties
Mixed-use buildings where less than 80% of rent comes from dwelling units
Short-term rental properties that function like hotels (more on this nuance below)

These are depreciated over 39 years (straight-line). 39 years is the standard recovery period for commercial buildings.

Short-Term Rentals (Hotel vs. Dwelling): A tricky case is a short-term rental (like an Airbnb or vacation rental). Is it residential 27.5-year or 39-year? The answer lies in that 80% test:

If the property is essentially used like a hotel or motel, it might not count as “dwelling units” for long-term use. The law says a unit in a building where more than half of the units are used on a transient basis (rented for short stays, typically under 30 days) is not a dwelling unit for the 80% test. So, for example, a large vacation rental property or a multifamily used mostly for short-term visitors could fail the residential test.
In practice, many single-family Airbnb rentals are still treated as residential rental property if they’re not providing substantial hotel-like services. But if you have, say, a 10-unit property that operates like a motel with mostly short-term guests, the IRS would likely deem it non-residential (39-year).

Practical tip: If in doubt, consult a tax advisor. But generally, long-term rentals = 27.5 years, transient-use properties = 39 years. Getting this right matters; using 27.5 when you should use 39 (or vice versa) is an error.

Why the difference? Residential rentals are believed to wear out a bit faster (and housing policy perhaps encourages more rapid cost recovery). Commercial buildings have a longer life in the tax code’s view. It’s largely a policy decision set by Congress.

Other property types: If you somehow had a truly unique rental property that doesn’t neatly fit (like renting out a piece of equipment or a trailer separately from land – those aren’t “real property” depreciation at all, they’d be personal property with shorter lives). But for buildings and structures, it’s 27.5 vs 39. Also, land improvements (sidewalks, fences, landscaping features) are often 15-year assets, even if attached to residential rental land.

Don’t mix them up: If you depreciate a residential property over 39 years, you’re shorting yourself deductions (taking too little each year). If you depreciate a commercial property over 27.5, you’re taking too much too fast (the IRS could claw back the excess deduction). So classify the property correctly from day one.

Land vs. Structure: Only Structures Depreciate

It’s worth reiterating: land is never depreciable. When you buy real estate, you are buying two things: land and the building (plus improvements). Land doesn’t wear out (at least in the eyes of tax law), so you cannot depreciate the portion of the cost attributable to land.

Allocation example: You purchase a property for $500,000. The county assessor values the land at $200,000 and the building at $300,000 (or you have an appraisal with a similar breakdown). You should allocate your purchase price in that proportion – e.g. 40% land ($200k), 60% building ($300k). Then $300k is your depreciable basis. If residential, that’s depreciated over 27.5 years (~$10,909/year). The $200k land is just a fixed non-depreciable asset – you’ll get it back when you sell as part of your basis, but you cannot deduct it over time.

Mistakes to avoid: Don’t try to depreciate 100% of the cost without removing land. Also, don’t use an unreasonable allocation (like claiming land is only 1% unless truly justified – land in high-value areas can often be 30-50% of the total value!). The IRS can challenge an allocation that is way off. Use realistic numbers (tax assessment values are a common safe harbor, though in some cases those might not reflect market – an appraisal or broker’s opinion can be used too).

Improvements and land development: Some costs that seem land-related might actually be depreciable land improvements. For instance, if you spend money on landscaping, driveways, parking lots, fences – those are land improvements that are depreciable (usually 15-year life). They’re not part of the building, but they’re also not raw land. So capitalize and depreciate those separately. Just the raw land itself is non-depreciable.

Personal property vs. building: Similarly, within the building, certain parts might be categorized as personal property (appliances, furniture, removable fixtures) and depreciated faster (5 or 7 years) – as seen with cost segregation. Make sure to classify those correctly; they’re not “land” obviously, but it’s about splitting building into components. This is more advanced, but can yield tax benefits.

Cost Basis vs. Market Value: Depreciate Your Cost, Not Value

Another key concept: Depreciation is based on your cost basis, not the property’s current market value. Some new landlords mistakenly think they can adjust depreciation each year to the property’s increasing value (no, you can’t), or that if the property goes up in value, maybe you shouldn’t depreciate (wrong).

Initial basis: When you acquire the property, your basis for depreciation is generally what you paid for it (plus direct purchase costs). That’s your starting point – e.g. $240k building basis on a $300k purchase as earlier.
No inflation adjustment: You continue depreciating that same original basis over the 27.5 or 39 years, regardless of what the property is worth in the market. If the house doubles in market value, you still depreciate the original $240k, not more. If the market crashes and the house value drops, you still depreciate $240k (until perhaps you sell or if it becomes impaired and you take a loss – but that’s another scenario). The tax law does not re-appraise each year; it sticks with cost (historical cost).
Improvements add to basis: The only time your depreciable basis increases is when you put more capital into the property (qualified improvements, renovations, etc., which get added and depreciated going forward). It does not increase just because the property is worth more on Zillow.
Example: You bought a rental for $100k (building) 20 years ago. You’ve been depreciating it. Now it’s worth $300k building alone. You cannot suddenly start depreciating $300k; you keep on with the schedule for the original $100k. When it’s fully depreciated, it’s done – even if the building is now extremely valuable. The upside is you might sell at a huge gain; the downside (tax-wise) is you had limited depreciation because you bought cheap. Conversely, if you buy an expensive property, you get more depreciation, even if the value later falls – the depreciation is locked in on your cost (subject to any casualty write-offs etc.).
Converted property basis note: If you convert a personal residence to a rental, your basis for depreciation is the lesser of your original cost or the fair market value at conversion. This prevents people from converting after a market drop and using a higher cost than current value. So if your house went down in value, you have to depreciate off the lower number at conversion. If it went up, you still use your cost (because it’s lower than FMV). Again, it’s tied to actual investment, not current value.

In short, depreciation mirrors what you paid (spreading that cost over time). It doesn’t follow market fluctuations. Think of it this way: the IRS lets you recover what you invested in the building, not what it might be worth at any given moment. So always track your cost basis and use that for depreciation – don’t worry about appraised values for this purpose.

Important Terms & Concepts Explained

Throughout this discussion, we’ve thrown around several tax terms. Let’s clarify some key concepts to ensure everything is crystal clear:

IRS (Internal Revenue Service): The U.S. government agency that administers federal tax laws. In this context, the IRS sets the rules for depreciation and enforces them. When we say “the IRS requires” something, it means it’s an official tax rule or procedure.
MACRS (Modified Accelerated Cost Recovery System): This is the depreciation system in the tax code used for most assets placed in service after 1986. It includes preset recovery periods and conventions. For real estate, MACRS uses straight-line depreciation (no acceleration) but still calls it MACRS. Under MACRS GDS (General Depreciation System), residential rental property = 27.5-year, non-residential = 39-year, with a mid-month convention (treats property as placed in service mid-month regardless of actual day, for prorating first-year depreciation). MACRS also encompasses accelerated methods for shorter-lived assets (200% or 150% declining balance for personal property), but real property is straight-line by law.
Basis (Cost Basis): The amount of your investment in the property for tax purposes. Original basis is generally the purchase price plus certain acquisition costs (and minus any seller credits, etc.). Adjusted basis is basis after changes like depreciation or improvements. Each year you depreciate, your adjusted basis is reduced by that depreciation. Basis is crucial for determining both depreciation and gain or loss on sale.
Recovery Period: The number of years over which you depreciate an asset. For rental real estate, the recovery periods are 27.5 years for residential and 39 years for non-residential (under GDS). If you elect or are required to use ADS (Alternative Depreciation System), the periods are longer (e.g. 30 years for residential if placed after 2017, or 40 years for non-residential). But most use GDS unless a special case applies (like certain tax-exempt use property or if you elect ADS to opt out of bonus depreciation for some reason).
Depreciation Recapture: The process of “recapturing” the benefit of depreciation at sale. Specifically for real estate, Section 1250 recapture means that the portion of gain attributable to depreciation is taxed at a maximum 25% rate (this is called unrecaptured Section 1250 gain). In practice, for individuals, any depreciation on real property comes back at 25% (unless you sell at a loss, then there’s no recapture beyond basis reduction). Recapture ensures that depreciation isn’t permanently tax-free; it’s essentially tax-deferred until sale (or permanently avoided if you never sell during your life and get a step-up basis at death).
Section 179 Deduction: A provision that allows businesses to expense (immediately deduct) certain asset purchases instead of depreciating them over years. For real estate investors, Section 179 generally does not apply to the building itself (you can’t 179 a rental building or its structural components). However, the law now allows Section 179 on some qualified improvements to non-residential property (like roofs, HVAC, security systems) and on some personal property assets (equipment, appliances) if you opt to. Residential rental property owners typically don’t use 179 for the building, but might for appliances or furniture if they choose (though often they use bonus depreciation instead if available). Section 179 has annual dollar limits and can’t create a loss in a rental unless you have other active income – and many states don’t allow it or have lower limits. So, while important, for our purposes the main takeaway is: you cannot expense an entire rental building in one year under 179; you depreciate over time, except perhaps some smaller assets.
Bonus Depreciation: A special depreciation allowance Congress has periodically allowed to accelerate depreciation. After 2017, it was 100% (meaning you could write off qualifying assets immediately) and is phasing down (80% in 2023, 60% in 2024, etc.). Buildings themselves (27.5 or 39-year assets) are generally not eligible for bonus – but components with shorter lives are. Many investors use bonus depreciation on things identified in cost segregation (like that 5-year and 15-year stuff). Bonus depreciation is automatic (unless you opt out) for qualifying assets and can create big deductions. Remember, though, many states do not conform to bonus (meaning you might add it back on the state return and depreciate normally for state, which we’ll cover next).
Passive Activity Loss Rules: Rental real estate is usually considered a passive activity for tax purposes (unless you’re a real estate professional or meet a special exception). This means that while depreciation can create a rental loss, you might not be able to use that loss against non-passive income (like wages) except under certain conditions (e.g. up to $25k allowed if you actively participate and your income is under $150k, or unlimited if you qualify as a real estate professional). It’s beyond our scope to dive deep here, but it’s worth noting: depreciation can create losses that get suspended if you have no other passive income or if you’re above the income threshold. Those suspended losses aren’t lost; they carry over and can be used when you have passive income or when you sell the property. Just be aware that depreciation might not give an immediate benefit if you’re in that situation – but it’s still valuable in the long run.

Armed with these definitions, you should feel more comfortable with the terminology. Depreciation has its own mini-language, but it boils down to: allocate your cost, use the right schedule, deduct each year, track it, and know there’s a payback (recapture) at the end (unless you strategize around it).

🗺️ Federal Law vs. State Variations

So far, we’ve focused on federal tax law (IRS rules) about depreciation. But what about your state taxes? States can have their own tweaks on depreciation. Here are important points on state-level variations:

Federal Conformity: Many states use federal taxable income as a starting point for state taxes, but not all states conform to every federal depreciation rule. Two big areas of difference are bonus depreciation and Section 179 expensing:

Bonus Depreciation Decoupling: A number of states do not allow federal bonus depreciation on the state return. For example, California completely disallows bonus depreciation. If you took 100% bonus on a new appliance federally, California requires you to add that back and depreciate it over the normal life for CA purposes. New York, New Jersey, Pennsylvania, and many other states also decouple from bonus (or have their own percentages). This means your state taxable income could be higher in the early years (since you don’t get the bonus deduction) but then you’ll continue depreciating in later years when federal has none. When preparing state returns, be careful to apply the correct depreciation rules for that state.
Section 179 limits: Some states have lower Section 179 deduction limits than federal. For instance, federal allows over $1 million of 179 expensing (as of mid-2020s), but California only allows $25,000 of Section 179 and disallows 179 for rental businesses entirely in some cases. Pennsylvania historically didn’t allow 179 for rental assets. States vary. If you expensed an asset under 179 on federal, you might have to depreciate it over time on the state return. This again can cause a state-federal difference.

No State Income Tax, No Worries?: If you’re in a state like Texas, Florida, Tennessee (no state income tax on individuals), then depreciation differences don’t matter for state (there’s no state return to file). But if your rental is in another state with taxes, you’ll likely file a nonresident return there too – and need to know that state’s depreciation rules.

State Depreciation Schedules: Some states fully conform to MACRS for regular depreciation (aside from bonus/179). Others might have unique adjustments. For example, a state might not have updated their conformity to post-2017 law, meaning they might still require 50-year life for certain leasehold improvements, etc., or not recognize 30-year ADS for residential rentals placed in certain years. These nuances usually affect relatively few cases, but professional tax software or state instructions will flag them.

State Recapture Taxes: When you sell, the federal depreciation recapture is at 25%. States, however, often tax all capital gains (including depreciation recapture) as ordinary income or at the same state income tax rate as any other income (since most states don’t have a lower capital gain rate). For example, if you sell a rental property located in California, the depreciation recapture and the rest of the gain will just be taxed as regular income at California’s high rates (up to 13.3%). California doesn’t give a capital gains break. Some states do have slight breaks (e.g., South Carolina might exclude a portion of capital gains, Arizona and Montana have some preferential treatment, etc.). But generally, expect to pay state tax on that depreciation recapture too. There’s no special 25% cap at the state level – your normal state tax rate applies.

Depreciation Add-Back on Sale: A few states have quirky rules when you sell an out-of-state property. For instance, New Jersey requires you to recompute gain for NJ purposes without bonus depreciation taken if that bonus wasn’t allowed in NJ in the first place, ensuring you don’t get double-taxed on differences. This is complex, but the takeaway is: if you took accelerated depreciation federally that your state disallowed, when you sell, the state’s calculation of gain will use its own depreciation amounts (so you don’t pay recapture on depreciation you never got in that state). States try to prevent mismatches, but the rules can be complicated.

Property Tax and Depreciation: Note that property taxes (annual taxes paid to local governments) have nothing to do with income tax depreciation. Property tax assessors value land and buildings based on market value or a formula; they do not care what your tax basis or depreciation is. Sometimes people confuse the two. Depreciation is for income tax only. Property tax law might use the word depreciation in valuation of older buildings, but it’s a different concept (just estimating wear for valuation). There’s no action needed on your part regarding depreciation for property taxes – it’s separate.

Different States, Multiple Returns: If you live in one state and have a rental in another, you’ll file in both. Typically, you’ll depreciate the same way for federal and for the rental’s state (with adjustments as required, like no bonus). Your home state often will give credit for taxes paid to the other state on that rental income, so you don’t double pay. It’s wise to use a tax preparer or software that handles multi-state returns, as allocating depreciation and income between states can be tricky.

Major state variations summary:

California: No bonus depreciation; $25k Section 179 limit and doesn’t allow it for passive rental entities; requires filing even if loss; high tax rates so recapture taxed heavily.
New York: Generally no bonus depreciation (decoupled), follows MACRS otherwise; high tax for recapture.
Texas/Florida/etc.: No state income tax – only follow federal (for federal return).
Pennsylvania: Has its own depreciation methods in some cases (they often decouple from bonus and had caps on 179).
New Jersey: Conforms mostly but handles out-of-state property depreciation differences carefully on sale (as mentioned).
Illinois: Conforms to federal except bonus – IL adds back bonus and then gives a special allowance spread out.
Arizona, Wisconsin, Minnesota: Various minor tweaks to depreciation or capital gain taxation (e.g., some allow a % exclusion of gains).
Everywhere: Keep records. You might need to provide depreciation schedules to state authorities if asked.

The key point: know your state’s rules or consult a CPA. Your strategy might differ slightly for state tax (for example, you might decide not to elect bonus depreciation federally if you don’t want the headache of different records for state – but many do anyway, it’s worth the saving). And always file required state returns even if your rental shows a loss – states often require a return if you have rental property located there, and they track depreciation differences for when you eventually sell.

✅ Pros and Cons of Depreciating Rental Property

To wrap up the strategic side, let’s summarize the advantages and disadvantages of depreciation for a rental property. While it’s not truly optional, understanding the pros and cons helps in planning:

Pros of Depreciation	Cons of Depreciation
Tax Savings & Cash Flow: Depreciation shields a portion of your rental income from taxes every year, often turning a profit into a paper loss. This means lower tax bills annually and more cash in your pocket (or available to reinvest).	Recapture Tax on Sale: When you sell, the IRS will “recapture” the depreciation by taxing it (up to 25%). This can create a significant tax bill at exit – essentially, depreciation is a tax deferral, not a free lunch (unless you avoid selling).
Leveraging Time Value: By deferring taxes via depreciation, you effectively get an interest-free loan from the government. You can use the tax savings now rather than later. If you reinvest those savings, you can grow your wealth faster. And if you hold the property long enough, inflation erodes the real value of the recapture tax due.	Complexity & Compliance: Properly depreciating assets adds record-keeping and complexity. You need to maintain schedules, allocate land vs building, and follow IRS rules closely. Mistakes can lead to audits, amended returns, or lost deductions. It’s a long-term commitment to track depreciation over decades.
Maximizing Deductions: Depreciation often creates or increases a net loss from your rental. If eligible, you might use that loss to offset other income (e.g. up to $25k for active participants, or unlimited if you’re a real estate professional). Even if you can’t use the loss immediately (due to passive loss limits), it accumulates to offset future rental income or gain. Either way, you eventually benefit.	Reduced Basis (No Step-Up until Death): Depreciation lowers your adjusted basis, so you have less “tax-free” amount when you sell. If you refinance or tap equity, depreciation could indirectly mean you owe more tax if you sell soon after. Essentially, it converts what would have been taxed as capital gain into a portion taxed at 25%. If capital gains rates are low for you, the 25% on depreciation is a bit higher than you might otherwise pay on that portion.
Inflation & Permanent Savings: If you never sell the property in your lifetime, depreciation can become a permanent tax savings. When you pass away, your heirs get a stepped-up basis to the property’s current value, wiping out the deferred gain and recapture. This means all the depreciation you took becomes tax-free forever. (Also, if you do a 1031 exchange, you can defer recapture indefinitely into new properties, potentially until death for the step-up – a common wealth-building strategy.)	Limited by Income in Short Term: Depreciation can create losses you can’t use immediately if you have no other passive income and your non-passive income is high (passive loss limitations). Those suspended losses are not wasted, but they tie up the benefit until you have future rental profits or sell the property. In essence, some tax savings might be delayed for high earners unless they qualify as real estate professionals.
Encourages Reinvestment: Because capital improvements can be depreciated, the tax system incentivizes upgrading properties. For example, adding a new roof increases your basis and gives you more depreciation deductions going forward. Depreciation thus softens the financial blow of major repairs/upgrades by spreading their cost through tax write-offs.	Paperwork for Adjustments: If you realize you’ve been depreciating incorrectly (wrong life, missed years, etc.), fixing it requires filing Form 3115 or amended returns, which can be tedious. Also, when selling, you must accurately calculate prior depreciation (allowed or allowable) to report gain – poor records could lead to misreporting and potential penalties.

As shown, depreciation offers significant benefits – it’s one of the biggest tax perks of real estate investing – but it comes with the eventual cost of recapture and the need for diligent tracking. The “cons” are mostly about timing (you pay later instead of now) and complexity, not about losing money overall. For almost every investor, the pros outweigh the cons, especially if you manage the asset wisely (either by holding long-term, using exchanges, or estate planning to eliminate the recapture).

The consensus among tax professionals and experienced investors is clear: take depreciation enthusiastically, plan for recapture intelligently, and use the system to your advantage. The cons are just the rules of the game; the pros are how you win at it.

❓ Frequently Asked Questions (FAQs)

Finally, let’s address some common questions real estate owners ask about depreciation – with straightforward answers. These are the kind of questions that pop up on forums (yes, even on Reddit) and among new landlords. We’ll give you the quick yes-or-no based answers:

Q: Do I really have to depreciate my rental property?
A: Yes. If your property is used for rental income, the IRS expects you to depreciate it. Even if you don’t claim it annually, you’ll still face depreciation recapture tax when you sell – so it’s effectively mandatory.

Q: Can I choose not to take depreciation to avoid paying recapture later?
A: No. Skipping depreciation doesn’t avoid anything – the IRS will act as if you took it. You’ll lose the yearly tax benefit and still owe recapture tax on the allowable depreciation when you sell.

Q: I haven’t been depreciating my rental for years – can I fix this?
A: Yes. You can file Form 3115 for a change in accounting method to “catch up” missed depreciation in one lump sum. This lets you claim all past unclaimed depreciation now without amending each prior year’s return.

Q: Is land depreciable as part of the property?
A: No. Land is never depreciated. Only the building and certain improvements can be depreciated. You must separate the land’s value and exclude it from your depreciation basis.

Q: If I make improvements (like a new roof or addition), do I depreciate those?
A: Yes. Capital improvements increase your basis and are depreciated, typically over the same 27.5-year life (if they’re part of the building structure). You cannot fully expense a major improvement in the year paid; you add it to basis and depreciate it going forward.

Q: Are appliances and furniture in a rental depreciated, too?
A: Yes. Personal property used in a rental (stove, refrigerator, carpet, furniture) is depreciated over shorter lives (usually 5 or 7 years). In recent years, you could even deduct them immediately with bonus depreciation or Section 179, but otherwise you depreciate them separate from the building.

Q: My rental property’s value is going up. Do I still need to depreciate it?
A: Yes. Depreciation is based on your cost, not market value. Even if the property appreciates, you must continue depreciating your original cost basis. Market gains have no effect on your yearly depreciation deductions.

Q: Does rental property depreciation work the same in every state?
A: Generally yes for calculating federal taxes, but states often adjust for things like bonus depreciation or have their own rules. You may have to use a different depreciation schedule for your state tax return if your state doesn’t follow federal bonus/179 rules.

Q: Will claiming depreciation increase my chances of an audit?
A: No. Depreciation is a normal part of rental expenses. Not claiming it is actually more unusual. As long as you calculate it correctly, depreciation won’t by itself raise audit risk. The IRS audits a small percentage of returns, and rental schedules are routinely filed with depreciation without issue.

Q: What happens when the property is fully depreciated?
A: Once you’ve taken the full depreciation (after 27.5 or 39 years), you can’t deduct more on that original cost. Your annual rental income will no longer get a shelter from depreciation. If you still own the property, you just stop depreciating it (unless you make new improvements which you can depreciate separately). When you sell, you’ll pay recapture on the amount you depreciated over the years.