Let’s say you purchase a $300,000 rental property, and the building itself (land stripped out) is worth $230,000. 

Using rental property depreciation, you get an $8,364 write-off every year and keep $3,095 in your pocket instead of Uncle Sam's.

In this blog, we’ll show you how to calculate depreciation on your rental property and use advanced tactics like bonus depreciation and Section 179 (for qualifying personal property) to squeeze every legal dollar out of your property.

Depreciation Basics: What It Is and Why It Matters

Think of depreciation as the IRS's way of admitting that buildings wear out. Each year you get to write off a slice of what you paid for the structure, even though no cash actually leaves your pocket. That paper expense lowers your taxable rental income and, at a 37% federal bracket, every $1 you write off can trim your tax bill by up to $0.37.

Unlike market value, this deduction exists purely on paper; it's a tax construct, not a reflection of what the property would sell for.

The IRS still makes the rules tough enough to keep things fair. You must own the property, it has to be available for rent—vacation homes you occupy don't count—the building should last more than a year, and land is immortal in the eyes of the IRS, so you can't write off dirt, only the building and later improvements.

To calculate the yearly write-off you'll use MACRS (Modified Accelerated Cost Recovery System).

For almost every small landlord, the default track is the General Depreciation System (GDS). It spreads the building cost over 27.5 years in equal slices. A handful of special situations (property used outside the U.S., financed with tax-exempt bonds, or tied to certain business elections) force you onto the Alternative Depreciation System (ADS) and its slower 30 or 40-year pace.

Industry veterans consistently rank this deduction among real estate's biggest tax breaks. Skip the deduction and you're simply paying more tax than the law requires—plus the IRS will still "recapture" phantom amounts when you sell. In short, claim it or lose twice.

Step 1: Determine Your Depreciable Basis

Most rental property owners mess up their depreciation from day one because they don't nail down the right starting number. The IRS calls this your "depreciable basis". Think of it as the portion of what you paid that you're allowed to write off over time.

Your depreciable basis starts with what you actually paid for the property. Pull out your HUD-1 or closing statement and find Line 101—that's your contract price. Now add the closing costs the IRS lets you roll into the property's cost instead of treating them as one-time expenses. These include legal fees, transfer taxes, title insurance, and recording charges.

Here's where it gets tricky: land never wears out, so the IRS won't let you write it off. You have to strip the land value out of your total purchase price. There are two practical ways to do this:

• County assessor method: Check your most recent property tax bill for the land-to-building percentage, then apply that ratio to your purchase price. Buy a property for $350,000 and the assessor says land represents 20% of the value? Your depreciable building basis is $350,000 × 80% = $280,000.

• Independent appraisal: If the assessor's ratios look questionable, hire an appraiser to give you a defensible split the IRS will accept.

Next, add any capital improvements you make after closing: new roof, room addition, or complete HVAC replacement. These improvements increase your basis because they extend the property's useful life, and each gets its own depreciation timeline.

Regular repairs don't count here. Track personal property like appliances or patio furniture separately since those items may qualify for faster write-offs under bonus depreciation rules.

It’s worth noting that landscaping costs for residential rental properties can be depreciated. Expenses for planting trees, shrubs, and other landscaping features can be spread out over time for tax purposes, giving owners extra deductions. Similarly, other permanent site improvements—excluding the main building—may also qualify for bonus depreciation.

Keep a digital folder with your closing statement, assessor printout, invoices, and receipts.

Step 2: Select the Correct Recovery System and Useful Life

You need to choose how long you'll spread your building's cost over. For almost every rental property owner, the choice is simple: use the GDS. This lets you write off your building over 27.5 years with equal amounts each year.

So if your building is worth $275,000, you'll deduct $10,000 annually ($275,000 ÷ 27.5 years). That's $3,700 in tax savings each year if you're in the 37% bracket.

There is an alternative depreciation schedule called the Alternative Depreciation System (ADS). ADS stretches the same residential rental building over 30 years (under current rules) and blocks bonus depreciation on related components. Using our $275,000 example, ADS gives you $9,167 annually—$833 less than GDS.

You're forced into ADS only when your property hits one of these triggers: your property is mainly used outside the United States, it's leased to or used by a tax-exempt organization, it's financed with tax-exempt bonds, or you elect "real property trade or business" status to fully deduct interest under section 163(j).

The upside? Lower depreciation now means less depreciation recapture when you sell; a trade-off that might make sense if you plan to hold the property for decades.

Once you pick a system, you're locked in. The IRS treats switching as a formal accounting method change that requires their approval. For most rental property owners who want to keep more cash today, GDS wins every time.

Step 3: Apply IRS Conventions and Depreciation Methods

The IRS has a rule called the mid-month convention that trips up many landlords. No matter what day you actually put your property into service, the IRS pretends it happened in the middle of that month. So whether you started renting on April 1st or April 30th, the tax code treats it as April 15th.

Miss this detail and every future year's depreciation gets thrown off, leading to painful IRS adjustments when they catch the error during an audit. The mid-month rule means you only get half a month of depreciation for the month your property first becomes available to rent.

The calculation is simple: Annual depreciation × (months in service ÷ 12).

Remember to count half a month for the starting month and, years later, another half-month when your 27.5-year depreciation period ends.

Here's how it works in practice: You buy a duplex with a $280,000 depreciable basis that generates $10,182 of annual depreciation ($280,000 ÷ 27.5). You place it in service on April 15th. Your first year gives you 8.5 months of depreciation: $10,182 × (8.5 ÷ 12) = $7,210. The next 26 full years each allow the complete $10,182 deduction. The final year delivers the remaining 9.5 months' depreciation (about $8,061), completing the schedule.

Residential rental buildings must use what's called the "straight-line method" or equal deductions every year. You can't speed up the write-offs or use accelerated depreciation methods like some business equipment allows. Trying to use accelerated methods like 150% or 200% declining balance on a residential building structure will get your return flagged by the IRS.

When you reach year 27.5, apply the same mid-month logic in reverse: take only half a month of depreciation, then stop. Your depreciation schedule should show exactly 27.5 years of deductions that add up to your full basis.

Step 4: Build Your Annual Depreciation Schedule

Once you know your write-off for the building, the next move is mapping it year by year. Create a simple four-column spreadsheet with Year, Annual Depreciation, Accumulated Depreciation, and Adjusted Basis. Everything else flows from those four numbers.

Imagine you bought a duplex last April 10. To calculate annual MACRS depreciation, you must first subtract the land value from the purchase price to determine the depreciable basis (since land cannot be depreciated). Divide the depreciable basis by 27.5 years to get your annual deduction. The IRS mid-month rule treats every start date as if the property were ready on the 15th, so Year 1 only gets 8.5 months of deductions.

Your first line calculation works like this: $10,182 × (8.5 ÷ 12) = $7,213 for Year 1.

Your accumulated depreciation sits at $7,213, and your adjusted basis (what you have left to write off) drops to $272,787.

Year 2 is simpler: a full $10,182 deduction, bumping accumulated depreciation to $17,395 and dropping basis to $262,605.

Now picture adding a new HVAC system on July 1 of Year 3 for $15,000. Because improvements must be written off separately, you add a second asset line. The building still claims its full $10,182. The HVAC starts with a prorated first-year deduction using the 5-year recovery period: $15,000 ÷ 5 × (5.5 ÷ 12) ≈ $1,375. After the two lines, Year 3 total depreciation reflects both assets accordingly.

Pro tip: A spreadsheet with SUM and IF formulas handles the calculations automatically, or you can use an online tool for instant year-by-year printouts.

Print or save the schedule every year; you'll need it to back up Schedule E Line 18 and each asset you list in Form 4562 Part III. Keeping an airtight depreciation table ensures the figures you report are accurate and consistent across forms, even though totals may not always match exactly.

How to Report Depreciation on Your Tax Return

Your depreciation gets reported on two forms. Schedule E is where you list each rental property's income and expenses on your personal tax return. Think of it as the summary page for all your rental activity. In Part I, put the property address in column A, then enter your total depreciation amount on Line 18. That single number should equal everything you calculated for the building plus any improvements you placed in service during the year.

Form 4562 is where you show your work. This form breaks down the depreciation calculation behind that Line 18 number. Jump to Part III, Section A, where each rental gets its own row. Column (c) gets the cost that's eligible for depreciation: your building value plus qualifying closing costs and improvements. Column (d) shows the recovery period (such as '27.5 yrs' for residential property). Column (g) shows your current-year write-off. The sum of the current-year depreciation amounts must match Line 18 on every Schedule E you attach.

Discovered you missed depreciation in previous years? Don't amend old returns. File Form 3115, Change in Accounting Method, and catch up the entire missed amount in one shot

Keep your HUD-1, appraisal, and improvement receipts with your completed Form 4562. The IRS can ask to see your records for up to three years after you file, so keep them handy. For records related to basis and depreciation, it's safer to keep them indefinitely or at least until the statute of limitations for the sale year expires, which can be decades after the initial purchase.

How to Maximize Tax Savings and ROI

Writing off a rental building over 27.5 years is safe but slow. You can speed up those deductions with a few smart moves that most property owners miss:

1. Bonus depreciation lets you write off a big chunk of certain property improvements in the year you buy them, instead of spreading those deductions over many years. Think appliances, flooring, or landscaping — anything with a useful life of 20 years or less qualifies. For 2025, 100% bonus depreciation was permanently reinstated for qualified property acquired after January 19, 2025. This means you can often expense these items entirely in the year they are placed in service.

2. Section 179 gives you another path to immediate write-offs on qualifying business equipment and personal property (like appliances and furniture), up to an annual limit. For 2025, this limit has been significantly increased to $2.5 million, with a phase-out beginning at $4 million. It generally doesn't cover structural improvements in residential rentals. Unlike bonus depreciation, Section 179 cannot create a net loss for the business on paper, so consider your income for the year when choosing between the two.

3. The real game-changer is a cost segregation study. An engineer breaks your property into smaller pieces: carpeting gets written off over 5 years, parking lots over 15 years, and so on. Even a modest reclassification that moves just $5,000 into a five-year schedule saves you about $1,200 in year-one taxes at the 24% rate.

Keep the momentum going with an annual December review. List any new capital improvements, make sure they're on the shortest legal depreciation schedule, and decide whether to accelerate them with bonus or Section 179.

Look ahead too: plan for depreciation recapture before you sell—often by pairing the exit with a 1031 exchange. If you spend 750 hours or more in real estate activities, explore real estate professional status to unlock passive loss limitations that could save you thousands more.

Six Common Mistakes When Calculating Rental Property Depreciation

Even experienced investors leave money on the table or invite IRS scrutiny by making simple depreciation mistakes. Here are the six errors we see most often and how to avoid them.

1. Never claiming depreciation at all. You're allowed to write off part of your building's cost every year, yet many owners skip this deduction entirely. The IRS assumes you took the depreciation when you sell, even if you didn't. That means you'll pay taxes on "phantom" write-offs you never claimed. Fix this by filing Form 3115 to catch up on missed years and reclaim thousands in overlooked deductions.

2. Writing off land value. Land doesn't wear out, so you can't depreciate it. If you write off your full purchase price, you're claiming deductions you're not entitled to and risking a 20% accuracy penalty. Split your cost using the county assessor's land-to-building ratio or get an appraisal. Only the building portion qualifies for depreciation.

3. Guessing the land-building split. Using rough estimates or outdated tax records throws off every future tax return. Keep your HUD-1 settlement statement and create a worksheet showing exactly how you calculated the percentages.

4. Ignoring the mid-month rule. The IRS treats rental properties as if they were placed in service halfway through any month, so your first and last years get prorated deductions. Skip this rule and your Schedule E won't match the depreciation tables built into tax software. Use IRS Table A-6 to recalculate, then amend returns if needed.

5. Mixing depreciation systems. Most rentals use the 27.5-year General Depreciation System. Certain situations require the slower 30 or 40-year Alternative Depreciation System. Pick the wrong system or try to switch midstream, and the IRS will recompute your deductions plus interest.

6. Double-counting improvements. A new roof or HVAC system is a capital improvement; you either expense it immediately or depreciate it over time, not both. Claiming it twice inflates your deductions and triggers audit adjustments. Track each improvement as its own asset on Form 4562 and follow the depreciation schedules for each component.

Keep detailed records (settlement statements, assessor valuations, invoices, and depreciation schedules) indefinitely for your basis records and until the statute of limitations for the year of sale expires. Good paperwork turns a potential IRS audit into a routine review.

Calculate Depreciation and Avoid Overpaying Your Taxes

Depreciating your rentals is one of the simplest ways to keep more cash in your pocket. Here’s all it takes:

• Pin down your basis (purchase price + closing costs – land).

• Choose the right system (GDS for most, ADS when required).

• Apply the mid-month convention.

• Record everything on Form 4562 so Schedule E reflects the full write-off.

• Update your schedule for new improvements like roofs or HVAC systems.

Pro tip: Stay organized. Keep closing statements, receipts, and invoices in one folder. Review your schedule before each filing season, and fix any missed depreciation right away to stay audit-ready.

Let us handle the math and forms. Town’s tax team builds precise depreciation schedules, ensures every form is filed correctly, and spots new deductions automatically. You keep your focus on growing your portfolio, we'll help keep the IRS bill as low as legally possible. Get started today.