U.S. real estate depreciation recovers eligible property basis over the applicable tax schedule. It is different from a market-value decline and from the cash needed to maintain a building. Whether a deduction reduces current tax depends on the taxpayer and applicable limitations.
Start with the property classification, depreciable basis, placed-in-service date, method and convention. This guide covers U.S. federal principles; state conformity and foreign tax systems require separate review.
In This Guide
- 1 Build the basis record before calculating a deduction
- 2 Recovery period and convention both matter
- 3 Placed in service is different from paid for
- 4 A deduction is not a reserve deposit
- 5 Check bonus depreciation and cost segregation carefully
- 6 Retain the schedule for a sale
- 7 An annual asset review
- 8 Sources
Build the basis record before calculating a deduction
Separate land from depreciable assets and document how acquisition costs and later adjustments are treated. Land is not depreciable merely because it is purchased with a rental building. A mortgage balance, an insurance replacement estimate and current market value are not interchangeable with the tax basis.
| Record | Question to resolve |
|---|---|
| Purchase and closing documents | Which costs are included and how are they allocated? |
| Land and building allocation | What evidence supports the values used? |
| Personal-to-rental conversion | Which conversion-date basis rule applies? |
| Improvements and asset replacements | What is capitalized and when was each asset ready for use? |
| Prior returns and adjustments | How much basis has already been recovered or otherwise adjusted? |
For a hypothetical purchase with $350,000 of total properly allocated basis, assume $75,000 is land and $275,000 is an eligible residential rental building. The building’s assumed depreciable basis is $275,000. This is an invented allocation, not a rule that every property has those proportions.
A former personal residence converted to rental use needs its own basis calculation and conversion-date value evidence. Do not simply apply the original purchase cost or today’s appraisal without checking the applicable rule.
Recovery period and convention both matter
Under the general depreciation system, the IRS lists 27.5 years for residential rental buildings and 39 years for nonresidential real property. Alternative-system requirements or elections can produce different periods. Separate equipment, improvements and other assets may have their own classifications.
In a simplified full-year straight-line illustration, $275,000 divided by 27.5 is $10,000. A fictional $390,000 nonresidential building divided by 39 also gives $10,000. These quotients are not a determination of the first-year deduction.
The mid-month convention applies to the relevant real property. The placed-in-service month affects the initial and final periods. Use the correct IRS table or calculation for the actual asset rather than assuming a full annual deduction in the purchase year.
Placed in service is different from paid for
IRS rental guidance connects placed-in-service status to being ready and available for the intended rental use. Purchase, delivery, installation, repairs and the start of a lease can occur on different dates. Keep evidence for the relevant date instead of choosing the one that produces the largest deduction.
Record later additions separately. A newly installed asset does not inherit the original building’s purchase date merely because it is in the same property. Review personal use and changes in use as part of the annual record.
A deduction is not a reserve deposit
Suppose a fictional property’s annual collected rent is $30,000, operating cash costs are $10,000, mortgage interest is $8,000 and loan-principal payments are $4,000. Assume total allowable depreciation of $10,000 for this simplified tax illustration and ignore other tax adjustments or limitations.
| Measure | Calculation | Amount |
|---|---|---|
| Illustrative taxable result before limitations | $30,000 minus $10,000 minus $8,000 minus $10,000 | $2,000 |
| Cash before capital spending and income tax | $30,000 minus $10,000 minus $8,000 minus $4,000 | $8,000 |
| Cash after an assumed $5,000 capital payment | $8,000 minus $5,000 | $3,000 |
The example assumes the stated total depreciation and omits any additional tax effects of the capital project. It shows that tax profit, loan principal and available cash are different. Depreciation does not supply the money to replace a roof. Use the capital-planning framework alongside the tax schedule.
Check bonus depreciation and cost segregation carefully
IRS Publication 946 describes the reinstated 100% special depreciation allowance for certain qualified property acquired and placed in service after January 19, 2025, subject to the applicable rules and elections. It is not a blanket immediate deduction for every rental building, improvement or HVAC project.
A cost-segregation analysis identifies asset classifications and allocates costs; it does not make every proposed classification correct. Review the underlying evidence, study cost, usable current deductions, future adjustments and state treatment with a qualified professional. Do not describe a larger first-year deduction as a guaranteed net tax benefit.
Retain the schedule for a sale
Depreciation-related basis adjustments can affect a later disposition. Suppose a fictional property’s $340,000 total basis is reduced by an assumed $60,000 depreciation adjustment, with no other basis changes. Adjusted basis is $280,000. If the net amount realized is $380,000, the simplified realized gain is $100,000.
A $150,000 loan repayment could leave $230,000 of sale cash, but it does not change that example’s $100,000 gain calculation. Gain character, depreciation-related treatment, exclusions or exchange provisions require separate analysis. Do not apply a flat 25% rate to all proceeds or describe all depreciation-related gains as identical.
See the gain-record guide and rental-deduction framework for the connected records. Check missed depreciation with a qualified professional; simply omitting a deduction does not necessarily avoid the required basis adjustment.
An annual asset review
- Reconcile acquisition and improvement invoices.
- Check classifications, basis, service dates, methods and conventions.
- Review rental use, elections and applicable loss limits.
- Carry forward the asset and depreciation records consistently.
- Keep cash reserves and sale-basis records separate from the deduction forecast.
Sources
- IRS Publication 527: residential rental property
- IRS Publication 946: depreciation systems and qualified allowances
- IRS Publication 544: dispositions and depreciation-related gain
Reviewed October 12, 2026. U.S. educational information. All basis, income and sale examples are hypothetical and omit facts needed for an actual tax return.
