Depreciation is usually the largest single deduction on a small landlord's Schedule E, and it's the one most often gotten wrong — either by skipping it, guessing at the numbers, or forgetting that the IRS will want some of it back when you sell.
Here's what it actually does.
The one-sentence version
The IRS assumes a residential rental building wears out over 27.5 years, so each year you deduct roughly 1/27.5 of the building's value against your rental income — whether or not the building lost a dime of real-world value.
That's the whole idea. Everything below is detail.
You don't depreciate what you paid for the property
You depreciate the building, not the land. Land doesn't wear out, so it never depreciates.
If you paid $240,000 for a duplex, your depreciable basis isn't $240,000. You have to split the purchase price between land and improvements. Three defensible methods, in rough order of how well they hold up:
- The property tax assessment ratio. Your assessor already splits assessed value into land and improvements. If the assessment says $30,000 land / $170,000 improvements, that's 15% land. Apply that ratio to what you actually paid: $240,000 × 85% = $204,000 depreciable basis. This is the most common method and the easiest to defend, because a third party produced the ratio.
- An appraisal that breaks out site value separately.
- A cost segregation study — more on that below.
Whatever you use, write down which method you used and keep the document. The land/building split is the single most audited number in this whole area, and "my accountant picked 80/20" is not a method.
What goes into basis
Your depreciable basis isn't just the purchase price times the building percentage. Add:
- Title fees, recording fees, transfer taxes
- Legal and survey costs tied to acquisition
- Any assumed liabilities
And capitalize, don't deduct, the work you do to get the property rent-ready before it's placed in service. A new roof three weeks before your first tenant moves in is not a repair — it's part of your basis.
The placed-in-service date
Depreciation starts when the property is available for rent, not when you bought it and not when a tenant moves in.
That distinction matters. If you close in March and spend two months renovating, your clock starts in May when you list it — not March. And the first year is prorated by month using the mid-month convention: a property placed in service in May gets 7.5 months of depreciation in year one, not 12.
If you bought a property this year and left it vacant and unlisted while you decided what to do, you may have no depreciation to claim at all for that period.
Repairs vs improvements — the distinction that decides everything
A repair is deducted this year, in full. An improvement is added to basis and depreciated over 27.5 years. Same dollars, wildly different tax timing.
The rough test: does the work restore the property to its prior condition, or does it better, restore, or adapt it?
| Deduct now (repair) | Capitalize (improvement) |
|---|---|
| Patch a roof leak | Replace the roof |
| Repaint a bedroom | Add a bedroom |
| Fix the existing HVAC | Replace the HVAC system |
| Replace a broken window pane | Replace all windows |
| Unclog a drain | Repipe the unit |
Two safe harbors are worth knowing because they let you deduct things that would otherwise be capitalized:
- De minimis safe harbor — with an election in place, you may expense items under $2,500 per invoice or per item outright.
- Small taxpayer safe harbor — if your building's unadjusted basis is under $1M and total annual repairs stay under the lesser of $10,000 or 2% of basis, you can expense them.
Both require you to actually make the election on the return. They're not automatic.
What depreciates faster than 27.5 years
Not everything in the building is on the long clock. Appliances, carpet, and furniture are 5-year property. Land improvements — driveways, fences, landscaping — are 15-year. Those shorter lives are also where bonus depreciation and Section 179 live.
This is the mechanism behind cost segregation: an engineering study that reclassifies chunks of a building into 5-, 7-, and 15-year buckets so you can take much larger deductions early. On a small single-family rental a study usually costs more than it returns. Somewhere north of $500K of basis it starts to pencil out, and on a small apartment building it often does.
Bonus depreciation percentages have been phasing down, and the rules have moved more than once in recent years. Confirm the current-year percentage before you plan around it rather than trusting a number you read in an older article — including this one.
The part nobody plans for: recapture
Here's the trade. Every dollar of depreciation you deduct reduces your basis. When you sell, gain is measured against that reduced basis — and the portion attributable to depreciation is taxed as unrecaptured Section 1250 gain, at up to 25%, rather than at long-term capital gains rates.
Worked through:
- Bought at $240,000, $204,000 depreciable basis
- Held 10 years, claimed roughly $74,000 of depreciation
- Adjusted basis is now about $166,000
- Sell for $300,000
Your gain is $134,000, not $60,000. Of that, ~$74,000 is depreciation recapture taxed up to 25%, and the remaining ~$60,000 is long-term capital gain.
And the sting: the IRS computes recapture on depreciation "allowed or allowable." If you never claimed depreciation, you still owe recapture on the amount you could have claimed. Skipping depreciation doesn't avoid the bill — it just means you paid for the deduction and never took it.
If you've missed years, the fix is Form 3115 (change in accounting method), which lets you catch up the missed depreciation in a single year rather than amending returns one at a time. That's a conversation to have with a CPA.
Where this touches your books
Depreciation is a non-cash entry: you debit depreciation expense and credit accumulated depreciation. Nothing moves in the bank. That's exactly why it gets forgotten in spreadsheet-based bookkeeping — there's no transaction to import, so nothing prompts you.
If your books are a bank feed and a spreadsheet, depreciation lives only in your CPA's workpapers, and your own P&L overstates profit all year. If you're running a real general ledger, the schedule sits in the books and your reporting reflects reality month to month.
That's the practical argument for keeping rental books on a real double-entry ledger rather than a categorized bank export: the largest deduction you get is one that never appears in a bank feed.
This is general information, not tax advice. Depreciation rules — especially bonus depreciation — change, and the right answer depends on your basis, your holding plan, and your income. Talk to a CPA before filing.