1. What is Rental Property Depreciation?

Rental property depreciation is a tax deduction that allows property owners to recover the costs of income-producing property over time. The IRS allows residential rental properties to be depreciated over 27.5 years using the straight-line method.

2. How Does the Calculator Work?

The calculator uses the standard depreciation formula:

Where:

• \( Cost\ Basis \) — Original purchase price plus any capital improvements
• \( Land\ Value \) — Value of the land (not depreciable)
• \( 27.5 \) — IRS-defined depreciation period in years for residential rental property

Explanation: Only the building value (cost basis minus land value) can be depreciated, spread evenly over 27.5 years.

3. Importance of Depreciation Calculation

Details: Proper depreciation calculation helps reduce taxable income from rental properties, potentially saving thousands in taxes each year. It's a non-cash expense that improves cash flow.

4. Using the Calculator

Tips: Enter the total property cost basis (purchase price + improvements) and the estimated land value. Both values must be positive numbers, with cost basis greater than land value.

5. Frequently Asked Questions (FAQ)

Q1: Why 27.5 years?
A: This is the IRS-defined recovery period for residential rental properties (27.5 years for residential, 39 years for commercial).

Q2: Can land be depreciated?
A: No, land never depreciates. Only the building and improvements can be depreciated.

Q3: When does depreciation begin?
A: Depreciation begins when the property is placed in service (ready and available for rent).

Q4: What if I sell the property?
A: When sold, accumulated depreciation is subject to depreciation recapture tax (currently up to 25%).

Q5: Can I accelerate depreciation?
A: For certain components, cost segregation studies may allow faster depreciation of some elements.