How to Calculate Depreciation on a Rental Property

Depreciation is one of the most valuable tax benefits available to real estate investors. If you own a rental property, understanding how to calculate depreciation can help you lower your taxable income and improve your cash flow.

This guide will explain what depreciation is, how to calculate it using the straight line depreciation method, and how terms like bonus depreciation, accumulated depreciation, and depreciation expense all factor into the equation.

What Is Depreciation on a Rental Property?

Depreciation is a way to account for the gradual wear and tear of a physical asset over time. For landlords, the IRS allows you to deduct a portion of your rental property’s cost every year as a depreciation expense, even if the property’s market value increases.

This non-cash expense reduces your taxable rental income, which can lead to major tax savings. You don’t need to sell your property to claim depreciation—it’s a yearly deduction for as long as the property is in service.

How Does Straight Line Depreciation Work?

Straight line depreciation is the most common method used to calculate depreciation on residential rental properties. The IRS requires that landlords depreciate rental buildings over 27.5 years using this method.

Here’s the basic depreciation formula:

(Cost Basis – Land Value) ÷ 27.5 = Annual Depreciation Expense

Let's break that down:

• Cost basis includes the purchase price plus certain closing costs and capital improvements.
• Land value must be subtracted, as land is not depreciable.
• Annual depreciation expense is the amount you can deduct from your rental income each year.

For example: If your rental property’s cost basis is $300,000 and the land is worth $50,000, your depreciable basis is $250,000.

$250,000 ÷ 27.5 = $9,090.91 annual depreciation expense.

Step-by-Step: How to Calculate Depreciation

1. Determine your cost basis: Add purchase price + eligible closing costs + capital improvements
2. Separate land value from building value: Use your property tax assessment or appraisal
3. Subtract land value from cost basis: This gives you the depreciable basis
4. Divide depreciable basis by 27.5: That’s your annual depreciation expense

Tip: Start your depreciation in the month the property is placed in service. The IRS provides a table for prorating the first and last year’s deduction.

‍

Related Reading: Is Landlord Insurance Tax Deductible?

What Is Accumulated Depreciation?

Accumulated depreciation is the total amount of depreciation you’ve claimed over the life of the property so far. For example, if you’ve owned a rental property for five years and deducted $9,090.91 each year, your accumulated depreciation would be $45,454.55.

This matters when you sell the property. The IRS requires you to “recapture” that amount and pay taxes on it, typically at a 25% rate. Knowing your accumulated depreciation can help you estimate your capital gains tax liability.

Bonus Depreciation and Section 179: What Landlords Should Know

Bonus depreciation allows investors to write off a large portion of qualified assets (like appliances or HVAC systems) in the year they’re placed in service. However, this primarily applies to personal property with a shorter useful life—not the building itself.

While businesses can also use Section 179 expensing to deduct certain assets immediately, this is less common for individual landlords, especially those not classified as real estate professionals. Still, if you’re installing new systems or fixtures, bonus depreciation may apply.

Depreciation and Taxes: What It Means for Landlords

Claiming depreciation reduces your annual taxable income, which lowers your tax bill. This is especially powerful because it's a "paper" deduction—you’re not actually spending that money each year.

However, when you sell the property, the IRS will recapture that depreciation. You'll need to pay taxes on the accumulated depreciation, even if the property lost value. It's a tradeoff, but one that typically benefits landlords in the long run.

Final Thoughts: Why Understanding Depreciation Matters

Depreciation is one of the most powerful tools landlords can use to reduce their taxable income. Whether you’re calculating your straight line depreciation, tracking accumulated depreciation, or factoring in depreciation expense on your tax returns, having a clear understanding of these terms will save you money and help you better manage your rental property finances.

If you're looking for a landlord insurance policy that complements your smart tax strategy, Steadily offers fast, affordable coverage tailored for rental property owners.

Get a quote today.