Rental Property Depreciation Calculator

People also ask

How do you calculate depreciation on a rental property?

Start with the depreciable basis: purchase price minus land value, plus capital improvements. Divide by the recovery period, 27.5 years for residential rentals, 39 for commercial, to get the annual straight-line deduction. A $300,000 purchase with $60,000 of land and $10,000 of improvements has a $250,000 basis and deducts about $9,091 per year. The first year is prorated under the mid-month convention based on when the property goes into service.

What is the 27.5-year rule for rental property?

The IRS assigns residential rental buildings a 27.5-year recovery period under MACRS, meaning owners deduct the building portion of their cost in equal annual amounts over 27.5 years, roughly 3.636% per year. Commercial property uses 39 years. The period reflects an assumed useful life for tax purposes only; it has nothing to do with how long the building actually lasts.

How much tax does depreciation save me?

Multiply the annual deduction by your marginal tax rate. A $9,091 deduction at a 24% bracket saves about $2,182 per year, roughly $182 per month, by sheltering that much rental income from tax. Higher earners in the 32% or 35% brackets save proportionally more, though passive activity loss rules can defer the benefit when depreciation pushes the property to a paper loss you cannot use yet.

Why is land excluded from depreciation?

The IRS view is that land does not wear out, so only the building and improvements are depreciable. You must split your purchase price between land and building, the defensible method is the ratio from your county assessor's statement, applied to what you paid. Typical land shares run 15% to 30% in most markets, but can exceed 50% in expensive coastal cities, which meaningfully shrinks the deduction there.

What is the mid-month convention?

Real estate depreciation starts at the midpoint of the month the property is placed in service, the day it is ready and available to rent, not the day a tenant moves in. If you place a property in service in June, you get 6.5 months of depreciation that year (half of June plus July through December). This calculator approximates that by crediting months in service minus half a month.

What counts as a capital improvement versus a repair?

Capital improvements add value, extend the property's life, or adapt it to a new use, a new roof, HVAC system, addition, or full kitchen renovation, and they are added to basis and depreciated. Repairs keep the property in ordinary operating condition: patching a roof, fixing a faucet, repainting a room, and are deducted fully in the year paid. Deducting a repair now is usually more valuable than depreciating it over 27.5 years.

What happens to depreciation when I sell?

The depreciation you took, or were allowed to take, is "recaptured" at sale and taxed at up to 25% federal as unrecaptured Section 1250 gain, separate from the capital gains tax on the rest of your profit. On a rental depreciated $90,000 over ten years, recapture alone can be about $22,500. A 1031 exchange defers recapture along with capital gains; the primary-residence exclusion does not shelter it.

Do I owe recapture if I never claimed depreciation?

Yes. The IRS computes recapture on depreciation "allowed or allowable," meaning the deduction you were entitled to counts against you at sale whether or not you took it. Owners who skipped depreciation should ask a CPA about filing Form 3115 to change accounting method and claim the missed depreciation as a catch-up deduction, usually far better than paying recapture on deductions never received.

What is cost segregation and is it worth it?

A cost segregation study reclassifies parts of a building: appliances, flooring, cabinetry, driveways, landscaping: into 5-, 7-, and 15-year MACRS categories instead of 27.5-year real property, front-loading deductions into early years. On properties above roughly $500,000 of basis, studies routinely accelerate six figures of deductions. Trade-offs: the study costs a few thousand dollars, and reclassified property recaptures at ordinary income rates rather than the 25% cap.

Can depreciation make my rental show a tax loss while I have positive cash flow?

Yes, and it is common. Depreciation is a non-cash deduction, so a property collecting more rent than it spends can still report a taxable loss. Passive activity rules govern whether you can use that loss now: taxpayers with modified AGI under $100,000 can deduct up to $25,000 of rental losses against ordinary income (phasing out to $150,000), real estate professionals can deduct more, and everyone else carries losses forward to offset future income or the gain at sale.

Does this calculator work for commercial property?

Yes, change the recovery period to 39 years, which is the MACRS life for nonresidential real property. Note that commercial property uses the same mid-month convention and straight-line method; the longer period simply spreads the same basis over more years, producing a smaller annual deduction. Mixed-use buildings are classified by which use produces more of the rental income.