Rental Property Depreciation

No. Any homeowner who rents out a property, a spare room, or an accessory dwelling unit (ADU) for income-producing purposes can generally claim depreciation. However, the complexity of your situation—especially regarding improvements and partial business use—often makes it beneficial to work with a tax professional to ensure compliance.

Yes. A 1031 exchange allows you to sell an investment property and reinvest the proceeds into a new “like-kind” property, deferring the capital gains tax and the depreciation recapture tax. This is a common strategy for investors looking to scale their portfolio without an immediate tax hit.

When you sell a rental property, you may be subject to depreciation recapture. The IRS may tax the accumulated depreciation you have claimed over the years at a specific rate (often capped at 25%) because you effectively reduced your taxable income by that amount during your ownership.

Depreciation begins the moment the property is “placed in service,” which means it is ready and available for rent. Even if you haven’t found a tenant yet, if the property is advertised and ready for occupancy, the depreciation clock begins.

No. The IRS does not allow you to depreciate land because it is considered to have an indefinite useful life—it does not wear out or decay due to use. When calculating your cost basis, you must specifically exclude the value of the land.

While both reduce your taxable income, they function differently:

• Operating Deductions: Expenses like property management fees, insurance, and routine repairs are deducted in the same year they are paid.

• Depreciation: This is a “non-cash” deduction. You do not spend cash to “pay” for depreciation; you are simply recovering the cost of the asset itself over many years.

To calculate it, you must first determine the cost basis of your building. This is the purchase price plus qualifying closing costs and major improvements, minus the value of the land (land is never depreciable). Divide this building-only cost basis by 27.5 years to find your annual deduction amount.

You are generally eligible if you meet three criteria:

• You own the property (legal title).

• You use the property for business or income-producing activity (like renting it out).

• The property has a determinable useful life (it will eventually wear out). If you use a property for personal use, it is generally not eligible, though you may be able to depreciate a portion of a home if you use it for a dedicated business purpose.

When you place a property into service—meaning it is ready and available for rent—you begin “depreciating” it. You divide the building’s value (its cost basis) by the IRS-mandated useful life (27.5 years for residential property). This resulting amount is a non-cash deduction you take on your taxes each year, even if the property’s actual market value is rising.

Rental property depreciation is an income tax deduction that lets you recover the cost of buying or improving an income-producing property over a set number of years. It acknowledges that physical assets naturally experience wear and tear, allowing you to deduct a portion of the building’s cost from your taxable income annually.