1. What is Rental Property Depreciation?

Depreciation is a tax deduction that allows rental property owners to recover the cost of income-producing property over its useful life (27.5 years for residential property). It accounts for wear and tear, deterioration, or obsolescence of the property.

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 useful life of residential rental property in years

Explanation: Only the building value (cost basis minus land value) can be depreciated over 27.5 years using the straight-line method.

3. Importance of Depreciation Calculation

Details: Proper depreciation calculation reduces taxable income, lowering tax liability while maintaining cash flow. It's a non-cash expense that provides significant tax benefits to rental property owners.

4. Using the Calculator

Tips: Enter the total property cost basis and the appraised land value. The land value should be less than the cost basis. Values must be positive numbers.

5. Frequently Asked Questions (FAQ)

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

Q2: What's included in cost basis?
A: Purchase price plus closing costs (excluding loan fees) plus capital improvements over the years.

Q3: What if I don't know the land value?
A: Use the property tax assessor's allocation or get a professional appraisal. Typically 15-25% of total value.

Q4: When does depreciation start and end?
A: Starts when property is placed in service (available to rent), ends after 27.5 years or when sold.

Q5: What about depreciation recapture?
A: When selling, accumulated depreciation is "recaptured" and taxed at a maximum 25% rate.