Depreciation is one of the most powerful tax advantages of real estate ownership: you deduct the building’s cost over 27.5 years, reducing taxable income—even if the building is appreciating in value.
How it works
The “depreciable basis” is the building cost only (not the land). Divide it by 27.5 years. That is your annual depreciation deduction. A $400,000 building depreciates $14,545 per year, reducing your taxable income by that amount for 27.5 years, even if the property never produces a single dollar of cash flow.
Depreciation is a non-cash deduction
You do not pay that money out; it is an accounting deduction only. But it can shelter significant income from tax. If your depreciation deduction is $14,000 and you have $12,000 in taxable income from the property, you can use $12,000 of the depreciation to eliminate that tax, and carry forward the unused $2,000.
Recapture tax is the catch
When you sell, the IRS recaptures all the depreciation you claimed and taxes it at 25%, higher than long-term capital gains rates. If you claimed $100,000 in depreciation, you owe $25,000 in recapture tax when you sell, in addition to capital gains tax on the appreciation. Plan for this.
What this does not include
This calculator shows the annual depreciation deduction amount only. It does not compute your actual tax savings (that depends on your tax bracket and whether the deduction phases out for you), nor does it plan for recapture tax at sale. Consult a tax professional.
How to use this calculator
- Enter the building cost (typically 75–80% of total purchase price; the rest is land, which does not depreciate).
- Residential rental property always depreciates over 27.5 years; the calculator applies this automatically.
- The result shows your annual depreciation and the total if you hold for your expected years.
Frequently asked questions
Can I claim depreciation on a property I own but do not rent?
No. Your primary residence and properties you own for personal use do not generate depreciation deductions. Only rental property and property held for business use qualifies.
What if I claimed too much depreciation?
The IRS will recapture it at sale regardless—you cannot take it back to avoid recapture tax. The deduction helps you today; the recapture is deferred until sale. Plan ahead with a tax professional.
Is 27.5 years the only depreciation period?
For residential rental property, yes—27.5 years is the depreciable life set by tax law. Commercial property is depreciated over 39 years. Personal property like appliances and furniture depreciates faster (5–7 years).
Does cost segregation change this?
Cost segregation is an advanced tax strategy that breaks the building into components (roof, HVAC, flooring) that depreciate faster than the 27.5-year residential life. It can dramatically increase near-term deductions. Discuss it with a tax professional if you own or are buying significant rental property.
