Rental Property Depreciation and Tax Deductions: How They Work
Owning a rental gives you two kinds of tax deductions. The first is ordinary operating costs: mortgage interest, property tax, insurance, repairs, management fees. The second is depreciation, a yearly deduction for wear on the building that costs you nothing in cash. For a house or apartment rented to long-term tenants, the IRS has you deduct the building's cost evenly over 27.5 years. Land is never depreciated. This guide shows the IRS first-year table, works through a $350,000 example, and covers the rules that limit or claw back the benefit: the passive loss rules, depreciation recapture at up to 25% when you sell, and the 1031 exchange that defers it. All figures are from the 2025 editions of IRS Publications 527, 946, 925 and 544 and the Internal Revenue Code.
The Short Answer
- Residential rental buildings are depreciated straight line over 27.5 years with the mid-month convention. A full year is 3.636% of the building's basis (Pub 946, Table A-6).
- Land is not depreciable. Split the price between land and building, using the property tax assessment if you have nothing better (Pub 527).
- Closing costs such as title insurance, recording fees, transfer taxes and legal fees go into basis. Loan points and lender fees do not; points are deducted over the loan term.
- Operating costs are deducted in the year you pay them: mortgage interest, property tax, insurance, repairs, management, advertising, utilities. Improvements are capitalized and depreciated instead.
- Losses are passive. Up to $25,000 a year can offset wages if you actively participate, phased out between $100,000 and $150,000 of modified AGI (IRC 469(i)). Unused losses carry forward.
- When you sell, the depreciation you took (or could have taken) is taxed as unrecaptured section 1250 gain at a maximum 25%. A 1031 exchange into other real property can defer it.
What Landlords Can Deduct
IRS Publication 527 says that "in most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income." You report them on Schedule E (Form 1040). The common ones:
| Expense | How it is deducted |
|---|---|
| Mortgage interest | Deductible on Schedule E. Interest on any cash-out refinance money spent on something other than the rental is not a rental expense. |
| Points and loan origination fees | Prepaid interest: deducted over the term of the loan, not in the year paid. |
| Property tax | Deductible on Schedule E. Assessments for new streets or sidewalks are added to basis instead. |
| Insurance | Deductible, but a premium paid for more than one year is spread over the years it covers. |
| Repairs and maintenance | Deductible in the year paid (see the next section for what counts as an improvement). |
| Management fees, advertising, cleaning, utilities you pay | Deductible in the year paid. |
| Legal and tax-prep fees | The part for the rental (for example, preparing Schedule E) is deductible. |
| Local car trips | Actual costs or the IRS standard mileage rate (for 2026, 72.5 cents a mile through June 30 and 76 cents from July 1; see 2026 mileage rates) for trips to collect rent or manage the property. Driving between your home and the rental is usually commuting, unless your home is your principal place of business. |
| Travel away from home | Deductible if the main purpose is to collect rent or manage, conserve or maintain the property. Not deductible if the main purpose is to improve it. |
| Expenses while vacant | Deductible while the property is held out for rent. Lost rent is not a deduction. |
| Depreciation | The building, improvements, appliances and furniture, spread over their recovery periods. |
What you cannot deduct: the principal part of your mortgage payment, the cost of the land, and the purchase price itself, which is recovered through depreciation. If a tenant pays one of your bills, Pub 527 treats the payment as rental income and the bill as your deductible expense.
Repairs vs Improvements
This line decides whether a cost is deducted this year or over 27.5 years. Pub 527: "An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use." Patching a leak, fixing a broken window or repainting a room is a repair. Pub 527's Table 1-1 lists examples of improvements, including:
- Additions: a bedroom, bathroom, deck, garage, porch or patio.
- A new roof, storm windows and doors, wiring upgrades, a security system.
- A heating system, furnace, central air conditioning or duct work.
- A water heater, septic system or water softener.
- Kitchen modernization, flooring, wall-to-wall carpeting, insulation, built-in appliances.
- Landscaping, a driveway, walkway, fence, sprinkler system or swimming pool.
An improvement is depreciated as its own item, starting when it is placed in service, over the life that would apply to the property it is part of: a new roof on a rental house is 27.5-year property. Two elections can still let you deduct some smaller costs at once: the de minimis safe harbor for tangible property and the safe harbor for routine maintenance. The IRS explains both in its tangible property regulations FAQ, which Pub 527 points to.
How Rental Property Depreciation Works
Three things set the deduction: the basis, the recovery period and the method.
- Basis. Usually what you paid, plus settlement costs that Pub 527 lists as part of basis: abstract fees, charges for installing utility services, legal fees, recording fees, surveys, transfer taxes, title insurance, and amounts the seller owed that you agreed to pay. Not included: fire insurance premiums, charges connected with getting the loan (points, assumption fees, credit report, lender-required appraisal) and money placed in escrow. Improvements made before you start renting are added too.
- Land vs building. Only the building is depreciated. Pub 527 divides the cost by fair market value, and "if you aren't certain of the FMVs of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes." Pub 527's example: an assessment of $136,000 for the house and $24,000 for the land puts 85% of the price on the building.
- A home you convert to a rental is depreciated from the lesser of its adjusted basis or its fair market value on the day you convert it.
- Recovery period. Under the General Depreciation System (GDS), residential rental property is 27.5 years. That covers a building where 80% or more of the gross rent comes from dwelling units. The Alternative Depreciation System (ADS), which you can elect, uses 30 years for residential rental property placed in service after 2017.
- Method. Pub 527: "You must use the straight line method and a mid-month convention for residential rental property." Mid-month means the property is treated as placed in service in the middle of the month, whatever the actual date.
- Start date. Depreciation starts when the property is "ready and available" for rent, not when a tenant moves in. Pub 527's example: a house ready on July 5 and first rented September 1 starts depreciating in July.
Shorter-lived items in a rental have their own classes (Pub 527, Table 2-1): appliances, carpets and furniture are 5-year property; fences, roads and shrubbery (if depreciable) are 15-year. Furnaces, water pipes and other structural parts of the building are 27.5-year property with the building.
First-Year Depreciation by Month (Table A-6)
Because of the mid-month convention, the first year gets only the months the property was in service. IRS Publication 946, Table A-6, gives the percentage to apply to the building basis. Every full year after that is 3.636% (years 10 to 27 alternate between 3.636% and 3.637% so the total comes to exactly 100%). The dollar column uses a hypothetical $100,000 of building basis.
| Month placed in service | Year 1 rate | Year 1 on $100,000 | Years 2 to 9 |
|---|---|---|---|
| January | 3.485% | $3,485 | 3.636% |
| February | 3.182% | $3,182 | 3.636% |
| March | 2.879% | $2,879 | 3.636% |
| April | 2.576% | $2,576 | 3.636% |
| May | 2.273% | $2,273 | 3.636% |
| June | 1.970% | $1,970 | 3.636% |
| July | 1.667% | $1,667 | 3.636% |
| August | 1.364% | $1,364 | 3.636% |
| September | 1.061% | $1,061 | 3.636% |
| October | 0.758% | $758 | 3.636% |
| November | 0.455% | $455 | 3.636% |
| December | 0.152% | $152 | 3.636% |
The month-of-service rate is just arithmetic: a January start counts 11.5 months out of 12, and 11.5 / 12 / 27.5 = 3.485%. Because the first year is short, the last bit spills into year 28 (property placed in service January to June) or year 29 (July to December). Pub 527's own example: a $160,000 building placed in service in February gives $160,000 × 3.182% = $5,091 for the first year.
The year you sell also uses the mid-month convention. Pub 946's example: a full year's depreciation of $3,636, property sold in March, so 2.5 months count: $3,636 × 2.5 / 12 = $757.50.
Worked Example: A $350,000 Rental
Hypothetical example. Numbers are chosen to show the method, not to describe a typical property.
You buy a single-family house for $350,000 and pay $5,000 of closing costs that belong in basis (title insurance, recording fees, transfer tax, attorney). The loan's points and appraisal are not included. The county assessment puts 20% of the value on the land. The house is ready for rent in June 2026.
| Step | Amount |
|---|---|
| Price + closing costs in basis | $355,000 |
| Land, 20% (not depreciable) | $71,000 |
| Building basis (depreciable) | $284,000 |
| 2026 deduction (June: 1.970%) | $5,594.80 |
| Each year 2027 to 2034 (3.636%) | $10,326.24 |
| Last year with a deduction | 2053 (year 28) |
A full year on Schedule E. Say in 2027 the house rents for $2,400 a month ($28,800). You pay $16,800 of mortgage interest, $4,200 of property tax, $1,800 of insurance, $2,000 of repairs and $1,000 of other costs: $25,800 in all, leaving $3,000 before principal payments. Depreciation of $10,326 turns that into a $7,326 tax loss, even though the property produced cash. Whether you can use the loss against your salary depends on the passive loss rules below. If your income is low enough to use it in full, at a 24% tax rate it is worth about $1,758 of federal tax.
The sale. In March 2036 you sell for $450,000 and pay 6% in selling costs, so you realize $423,000. Depreciation through the sale totals $100,685 (2026 through 2035, plus 2.5 months of 2036). Your adjusted basis is $355,000 minus $100,685 = $254,315, and the gain is $168,685. Of that, $100,685 is unrecaptured section 1250 gain, taxed at up to 25% (at most $25,171). The other $68,000 is ordinary long-term capital gain (at 15%, $10,200).
Rental Depreciation Calculator
Enter the price, closing costs that go into basis, the land share and the month the property was first ready for rent. The calculator applies the Pub 946 Table A-6 rates, shows the year-by-year schedule, and, if you add a sale, the depreciation taken through the sale and the tax on it at the 25% maximum.
It covers the building only. Appliances, carpets and furniture (5-year property) and improvements made after you start renting are depreciated separately. The 25% figure is a maximum: the part of that gain that falls in a lower ordinary bracket is taxed at that lower rate. The 3.8% net investment income tax and state tax are not included.
Can You Deduct a Rental Loss? Passive Loss Rules
Pub 527: "In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities." A passive loss can normally offset only passive income. Losses you cannot use carry forward to later years, and they are generally allowed in full in the year you dispose of your entire interest in a fully taxable sale to an unrelated buyer (Pub 925).
The $25,000 special allowance
IRC 469(i) lets an individual who actively participates deduct up to $25,000 of rental real estate losses against nonpassive income such as wages. Active participation is a low bar: you (with your spouse) own at least 10% of the property and make management decisions such as approving tenants, setting rent and approving expenses, even if a property manager handles the day-to-day work.
| Filing status | Maximum allowance | Full allowance if MAGI is | Gone at MAGI of |
|---|---|---|---|
| Single, married filing jointly | $25,000 | $100,000 or less | $150,000 |
| Married filing separately, lived apart all year | $12,500 | $50,000 or less | $75,000 |
| Married filing separately, lived together at any time | $0 | n/a | n/a |
Between those points the allowance drops by 50 cents for every dollar of modified AGI over $100,000. Pub 925's example: a single filer with $120,000 of MAGI and a $31,000 rental loss can deduct $15,000 ($25,000 minus 50% of $20,000) and carries the other $16,000 forward.
Real estate professional status
Above $150,000 of MAGI, the way to use rental losses against other income is to qualify as a real estate professional and materially participate in the rentals. IRC 469(c)(7)(B) requires both, in the same tax year:
- "more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates", and
- "more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates."
On a joint return one spouse must meet both tests alone. Hours worked as an employee in real estate do not count unless you own more than 5% of the employer. Someone with a full-time job outside real estate almost never passes the "more than half" test. Keep a contemporaneous log of hours: this status is a common audit issue.
Bonus Depreciation and Cost Segregation
The One Big Beautiful Bill Act (Public Law 119-21) brought back 100% bonus depreciation. Pub 527 (2025): "The 100% special depreciation allowance is restored for qualified property acquired and placed into service after January 19, 2025." Property acquired before January 20, 2025 stays on the old phase-down, which is 40% for property placed in service in 2025 (Pub 946).
The limit that matters for landlords: qualified property is "tangible property depreciated under MACRS with a recovery period of 20 years or less" (Pub 946). The rental building itself, at 27.5 years, does not qualify. Appliances, carpets and furniture (5-year) and fences or other depreciable land improvements (15-year) do, whether new or, in many cases, used. Bonus applies unless you elect out, and you can elect 40% instead for the first tax year ending after January 19, 2025. The section 179 deduction is different: Pub 946 says rental property does not qualify "if renting property is not your trade or business."
Cost segregation is an engineering study that splits a building's cost into the parts with shorter lives (5-, 7- and 15-year property) and the 27.5-year structure, so more of the cost can be depreciated faster and, now, expensed with bonus depreciation. The IRS Cost Segregation Audit Techniques Guide describes the incentive: shorter recovery periods and bonus give "a faster depreciation write-off". Two cautions. Studies cost money and the IRS checks how costs were assigned. And when you sell, depreciation on those shorter-lived items (section 1245 property) is taxed as ordinary income, not at the 25% cap (Pub 544). For a single-family rental the deduction is largely timing; get a tax professional to run the numbers first.
Depreciation Recapture When You Sell
Depreciation lowers your basis, so it raises your gain when you sell. On a rental building depreciated straight line and held more than a year, that part of the gain is unrecaptured section 1250 gain. IRS Topic 409: "The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate." The rest of the gain gets the normal long-term rates of 0%, 15% or 20% (see capital gains tax), and the 3.8% net investment income tax can apply on top for higher incomes.
"Allowed or allowable." Skipping depreciation does not avoid recapture. Pub 527: "If you didn't claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted." If you missed years, Pub 946 explains how to correct it with an amended return or an accounting method change (Form 3115) rather than losing the deduction.
Former home. If you sell a rental that you also lived in, the home sale exclusion (up to $250,000, or $500,000 joint) can still apply if you meet the 2-of-5-year tests, but Pub 523 says "you can't exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997." That part stays taxable. The home sale proceeds calculator shows the cash side of a sale.
1031 Exchanges
A like-kind exchange under IRC 1031 defers the whole gain, recapture included, when you trade one investment or business property for another. The main rules:
- Real property only. IRC 1031 covers "real property held for productive use in a trade or business or for investment" exchanged for like-kind real property, for exchanges completed after December 31, 2017. Your home and property held mainly for sale (a flip) do not qualify.
- 45 days after you transfer the property you give up, you must identify the replacement in a signed written document (Pub 544). You can name up to three properties of any value, or more if their total value is no more than double what you gave up.
- 180 days, or your tax return's due date with extensions if that comes sooner, is the deadline to receive the replacement.
- Cash or other property you receive ("boot") is taxable up to the gain.
- Basis carries over. The new property takes the old one's basis (IRC 1031(d)), so the deferred gain and depreciation follow you to the next property.
In a deferred exchange you cannot touch the sale proceeds; a qualified intermediary normally holds them. Exchanges are reported on Form 8824.
The 20% QBI Deduction for Rentals
The section 199A qualified business income deduction lets eligible taxpayers "deduct up to 20 percent of their QBI" (IRS). Rental income counts only if the rental is a trade or business. Revenue Procedure 2019-38 gives a safe harbor: keep separate books for each rental enterprise, keep contemporaneous logs of the services and who performed them, and have 250 or more hours of rental services a year (for an enterprise at least four years old, in any three of the last five years). Hours by employees or contractors such as a property manager count. Triple net leases and property you use as a residence are excluded. A rental that misses the safe harbor can still qualify if it is a trade or business under section 162. Income limits and the details are in the Form 8995 and 8995-A instructions.
Vacation Homes and Short-Term Rentals
- Rented fewer than 15 days in a year and also used as your home: you do not report the rent at all, and you cannot deduct rental expenses (Pub 527).
- Used as a home: if your personal use is more than the greater of 14 days or 10% of the days rented at a fair price, expenses are split between personal and rental days, and rental expenses cannot create a loss against other income. The excess carries forward.
- Hotel-style services such as regular cleaning or changing linen for guests move the rental to Schedule C, where self-employment tax can apply.
Short-term rentals raise one more passive-activity question. Under Pub 925, an activity where "the average period of customer use of the property is 7 days or less" is not treated as a rental activity, so the $25,000 allowance does not apply and material participation decides whether a loss is passive. Pub 925 covers those tests.
For the cash-flow side of a purchase, use the rental property calculator. Whether a rental beats other investments is covered in is real estate a good investment.
Sources & Methodology
- IRS Publication 527 (2025), Residential Rental Property, for deductible expenses, repairs vs improvements, basis, the 27.5-year recovery period, the mid-month convention, the $25,000 allowance, bonus depreciation and personal-use rules.
- IRS Publication 946 (2025), How To Depreciate Property, Table A-6, the year-of-sale example, qualified property for the special depreciation allowance and section 179.
- Instructions for Form 4562 (2025), for the recovery periods and the 30-year ADS period.
- IRS Publication 925 (2025) and Topic no. 425, for the passive activity rules and phase-out example; Topic no. 414 for rental income and expenses.
- 26 U.S.C. 469, subsections (c)(7) and (i).
- IRS Topic no. 409 and 26 U.S.C. 1(h), for the 25% rate on unrecaptured section 1250 gain; IRS Publication 544 (2025) for recapture and like-kind exchange rules.
- 26 U.S.C. 1031, for the real-property-only rule and the 45/180-day deadlines.
- IRS Publication 523, for depreciation after May 6, 1997 on a home sale.
- Revenue Procedure 2019-38 and the IRS QBI deduction page, for the rental safe harbor.
- IRS Cost Segregation Audit Techniques Guide (Pub 5653), for how cost segregation works. The IRS notes the guide is not an official statement of law.
The worked example and calculator use the Table A-6 percentages on the building basis, as the IRS examples do. Exact straight-line math (basis / 27.5) gives a few dollars more per year because the table rounds to three decimals.
FAQ
How many years do you depreciate a rental property?
27.5 years for a residential rental building under GDS, using straight line and the mid-month convention. Appliances, carpets and furniture are 5 years; fences and shrubbery 15 years. If you elect ADS, residential rental property placed in service after 2017 uses 30 years.
How do I calculate depreciation on a rental property?
Start with the price plus closing costs that belong in basis, subtract the land's share, and multiply the building basis by the Pub 946 Table A-6 rate: 3.636% for a full year, less in the first year depending on the month. A $284,000 building gives $10,326 a year.
Can I depreciate the land?
No. Land does not wear out, so its cost is never depreciated. Most land preparation and landscaping costs are added to the land's basis too.
When does depreciation start?
When the property is ready and available for rent, even if no tenant has moved in yet.
What if I never claimed depreciation?
You still reduce your basis by the depreciation you could have claimed, and it is still taxed when you sell. You can usually catch up with an amended return or an accounting method change (Form 3115); Pub 946 explains which applies.
Can rental losses offset my salary?
Up to $25,000 a year if you actively participate and your modified AGI is $100,000 or less. The allowance shrinks by 50 cents per dollar above that and is gone at $150,000. Real estate professionals who materially participate are not limited by it.
What is depreciation recapture on a rental?
When you sell, the gain up to the depreciation you took (or could have taken) on the building is unrecaptured section 1250 gain, taxed at a maximum 25%. Depreciation on 5- or 15-year items is taxed as ordinary income.
Does bonus depreciation apply to rental property?
Not to the building. It applies to property with a recovery period of 20 years or less, such as appliances, carpets, furniture and fences. For property acquired and placed in service after January 19, 2025, the rate is 100% unless you elect out or choose 40%.
Is a new roof a repair or an improvement?
An improvement. Pub 527 lists a new roof as an improvement; it is depreciated over 27.5 years as a separate item starting when it is placed in service.
This article is for general information and is not tax advice. Figures are from the 2025 editions of IRS Publications 527, 946, 925 and 544, the Form 4562 instructions and the Internal Revenue Code, checked against the primary sources on 2026-10-27. The worked example and calculator results are hypothetical illustrations. Your result depends on your whole return and your state's rules; consider a tax professional before a cost segregation study, a 1031 exchange or a sale.