1. What is Rental Property Depreciation?

Rental property depreciation is an annual tax deduction that allows property owners to recover the costs of income-producing property over time. For residential rental properties, the IRS allows depreciation over 27.5 years using the straight-line method.

2. How Depreciation is Calculated

The standard calculation for residential rental property depreciation:

Where:

• Cost Basis - The original purchase price plus any capital improvements
• Land Value - The appraised value of just the land (not depreciable)
• 27.5 - The number of years over which residential property is depreciated (as per IRS guidelines)

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

3. Importance of Depreciation

Details: Depreciation reduces taxable income from rental properties, often resulting in significant tax savings. It's a non-cash expense that can offset rental income while maintaining positive cash flow.

4. Using the Calculator

Tips: Enter the total property cost basis (purchase price + improvements) and the land value (from property tax assessment or appraisal). The land value must be less than the total cost basis.

5. Frequently Asked Questions (FAQ)

Q1: Why can't land be depreciated?
A: Land doesn't wear out, become obsolete, or get used up like buildings do, so IRS rules prohibit depreciating land.

Q2: What if I don't know the land value?
A: Check your property tax assessment, which typically separates land and building values, or get a professional appraisal.

Q3: When does depreciation begin and end?
A: Depreciation begins when the property is placed in service (available for rent) and ends after 27.5 years or when the property is sold.

Q4: What about commercial properties?
A: Commercial properties use a 39-year depreciation period instead of 27.5 years.

Q5: What happens when I sell the property?
A: You may need to pay depreciation recapture tax on the total depreciation taken during ownership.