Rental Property Depreciation: How It Works (2026 Guide)

Depreciation is the largest tax deduction most landlords take — and the one most often calculated wrong. Done right, it can turn a cash-flow-positive rental into a paper loss that shelters other income. Done wrong, you either overpay tax for years or get hit with a surprise recapture bill at sale.

Here's how rental property depreciation actually works.

The basic formula

Residential rental property depreciates over 27.5 years (commercial is 39). Only the building depreciates — land does not.

Step 1 — Establish your depreciable basis

Start with what you paid, then adjust:

• + Purchase price
• + Closing costs (title, recording, transfer tax — not loan fees)
• + Capital improvements made before placing in service
• − Land value

The land/building split is usually based on the county assessor's allocation — if your tax card says land is 20% of value, use 20%. In high-cost markets, push for a lower land allocation (with appraiser support) to maximize depreciable basis.

Worked example

You buy a single-family for $300,000. Closing costs $4,000. Assessor allocates 20% to land.

• Total basis: $304,000
• Land (20%): $60,800
• Depreciable basis: $243,200
• Annual depreciation: $243,200 ÷ 27.5 = $8,844/year

Step 2 — Place-in-service date matters

Depreciation starts the day the property is available to rent, not the day you close. If you close in March but rehab through June, your first year of depreciation is partial (mid-month convention starting in July).

Improvements get their own clocks

Big-ticket improvements after placing in service depreciate separately:

• New roof: 27.5 years
• HVAC system: 27.5 years (or eligible for Section 179 in some cases)
• Appliances: 5 years
• Carpet: 5 years
• Furniture: 7 years
• Land improvements (driveway, fencing): 15 years

Cost segregation — accelerating depreciation

A cost segregation study identifies components of the building that can be depreciated on 5-, 7-, or 15-year schedules instead of 27.5 — generally 25–35% of the building's value. Combined with bonus depreciation (60% in 2026, phasing down), this can front-load tens of thousands in deductions.

Rule of thumb: cost seg studies cost $3,000–$7,000 and make sense on properties over $400K basis.

The recapture catch

When you sell, the IRS "recaptures" depreciation at up to 25% — even if you didn't actually claim it (the IRS assumes you did either way). Always claim the depreciation. Always.

Three ways to defer or avoid recapture:

• 1031 exchange — defer it into the next property (see our 1031 primer)
• Hold until death — heirs get a stepped-up basis, recapture is forgiven
• Live in it 2 of 5 years before selling — Section 121 exclusion (subject to non-qualified-use rules)

Passive activity loss limits

Depreciation often creates a paper loss. Whether you can deduct it against W-2 income depends on your AGI and status:

• AGI under $100K: up to $25K of rental losses deductible against ordinary income
• AGI $100K–$150K: deduction phases out
• AGI over $150K: losses suspended until you sell, unless you qualify as a Real Estate Professional

How Havyn helps

Havyn tracks acquisition basis, capital improvements with their own depreciation schedules, and accumulated depreciation per property — so your year-end Schedule E export is depreciation-ready. See it on the features page.