How to Calculate Depreciation on Rental Property

Rental property depreciation is the one deduction a landlord takes every year without spending anything, and the one with the most arithmetic. The four steps below follow IRS Publication 527 (2025): find the depreciable basis, fix the placed-in-service date, apply the 27.5-year mid-month table, and report the result on Form 4562 and Schedule E. Repairs versus improvements and recapture on sale come after.

Step 1: Basis, and taking the land out

The starting point is cost: the purchase price plus the settlement fees and closing costs that attach to the property, such as legal fees, recording fees, transfer taxes and title insurance. Points and loan-related charges are not part of basis. Then remove the land. Publication 527 says you cannot depreciate land because it generally does not wear out, and that clearing, grading and landscaping are usually part of its cost.

To split a single purchase price, Publication 527 uses the ratio of each asset’s fair market value to the whole, and allows the property tax assessment as the fallback. Its example: a $200,000 house-and-land purchase where the assessment shows $136,000 for the house and $24,000 for the land gives 85% to the house ($170,000 of basis) and 15% to the land ($30,000). A home converted to rental use starts with the lesser of its fair market value or adjusted basis on the conversion date.

Step 2: The month the property was placed in service

Depreciation begins when the property is ready and available for rent, not when rent starts. In Publication 527's examples, a house bought April 6, repaired and advertised in July and first rented September 1 is placed in service in July, and a former home listed with an agent October 1 and rented December 1 is placed in service October 1. The month matters because of the convention in Step 3.

Step 3: 27.5 years, straight line, mid-month

IRC 168 sets three rules for a residential rental building: a 27.5-year recovery period (section 168(c)), the straight line method (168(b)(3)) and the mid-month convention (168(d)(2)), which treats property placed in service or sold in any month as placed in service at the midpoint of that month. A building qualifies as residential rental property when 80% or more of its gross rental income comes from dwelling units; a nonresidential building uses the same method over 39 years. Publication 527 turns the rules into Table 2-2d: 3.636% of basis for each full year, and a first year that depends on the month.

Step 4: Form 4562 and Schedule E

For the year a building is first placed in service, enter it on Form 4562 (2025), Part III, Section B, line 19i (residential rental property, 27.5 years, MM, S/L; a commercial building goes on line 19j at 39 years). The 2025 form added a new line 19h for 50-year property, so check the line letter. The total flows to Schedule E, line 18. The Schedule E instructions say Form 4562 is attached only for property first placed in service during the year, for listed property such as a vehicle, or for a section 179 or amortization deduction beginning that year; in later years the depreciation goes straight on line 18. Depreciation is not optional: basis is reduced by the amount allowed or allowable whether or not you claim it, so a landlord who skipped it still faces recapture on sale. The fix for missed years is a Form 3115 accounting method change (automatic change number 7 in section 6.01 of Rev. Proc. 2025-23), which catches up the missed amount in one year.

Repairs you deduct, improvements you depreciate

Publication 527 draws the line with three words from the tangible property regulations: an expense that results in a betterment, a restoration, or an adaptation to a new or different use is an improvement and must be capitalized; anything else that keeps the property in ordinary operating condition is a repair, deductible in the year paid. Fixing a pre-existing defect or enlarging the property is a betterment; replacing a substantial structural part is a restoration. An improvement is depreciated as a separate item with the building’s own period: an addition placed in service in 2025 on a house rented since 1999 is 27.5-year property from 2025.

Three safe harbors on the IRS tangible property regulations page let smaller owners skip the analysis:

• De minimis safe harbor (Reg. 1.263(a)-1(f)): elect each year to deduct items costing up to $2,500 per invoice or item, or $5,000 with an applicable financial statement. Publication 527 puts these amounts on Schedule E, line 19.
• Safe harbor for small taxpayers (Reg. 1.263(a)-3(h)): an owner with average annual gross receipts of $10 million or less can deduct all repairs, maintenance and improvements on a building whose unadjusted basis is $1 million or less, as long as the year’s total does not exceed the lesser of 2% of that basis or $10,000. It is an annual election by statement.
• Routine maintenance safe harbor: recurring work you expect to perform more than once during the 10-year period after a building is placed in service is not an improvement.

Everything else in the building depreciates faster

The 5-, 7- and 15-year items qualify for bonus depreciation, which the building does not, and on a larger purchase a cost segregation study documents how much of the price belongs to those classes. Publication 946 keeps section 179 away from property acquired only for the production of income, including rentals that are not your trade or business.

Recapture: what the deduction costs when you sell

A building is section 1250 property. Publication 544 treats gain as ordinary income only to the extent of additional depreciation, meaning depreciation above straight line, and says there is none for property depreciated straight line and held more than a year. So a rental sold at a gain has no ordinary recapture on the building. Instead, the part of the long-term gain attributable to depreciation is unrecaptured section 1250 gain, taxed at a maximum rate of 25% under IRC 1(h)(1)(E) rather than the 15% or 20% rates, and figured on the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions. Gain on 5-year property such as appliances is section 1245 ordinary income up to the depreciation taken. Because recapture runs on depreciation allowed or allowable, skipping the deduction does not avoid it. The timing of a sale against a high or low income year is one of the moves on the year-end tax planning checklist.

Sources: IRS Publication 527 (2025), Residential Rental Property, chapter 2 and Table 2-2d; IRS Publication 946 (2025), How To Depreciate Property; 26 U.S.C. 168(b), (c), (d), (e) and (g), recovery periods, methods and conventions; IRS Form 4562 (2025), Part III, line 19i; IRS, 2025 Instructions for Form 4562; IRS, 2025 Instructions for Schedule E (Form 1040), line 18; IRS, Tangible property final regulations, frequently asked questions (reviewed August 4, 2026); 26 CFR 1.263(a)-3(h), safe harbor for small taxpayers; 26 CFR 1.263(a)-1(f), de minimis safe harbor election; IRS Publication 544 (2025), Sales and Other Dispositions of Assets, section 1250 property and capital gains rates; 26 U.S.C. 1(h)(1)(E) and (h)(6), 25% rate on unrecaptured section 1250 gain; IRS, 2025 Instructions for Schedule D (Form 1040), Unrecaptured Section 1250 Gain Worksheet; IRS Rev. Proc. 2025-23, section 6.01 (automatic change number 7 for missed depreciation). Percentages, rules and form lines checked against these sources on September 26, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.