What is the 27.5 year depreciation rule for rental property?

The IRS requires residential rental property to be depreciated over 27.5 years using the straight-line method. This means you deduct an equal portion of the building's cost basis each year. Only the building value is depreciated. Land is never depreciated because the IRS considers it to have an indefinite useful life.

What is a cost segregation study and is it worth it?

A cost segregation study is an engineering-based analysis that reclassifies building components into shorter depreciation categories: 5-year (appliances, carpeting), 7-year (furniture, fixtures), and 15-year (landscaping, parking lots) instead of the default 27.5 years. On a $120,000 building, a cost seg study typically reclassifies 20% to 40% of the value into these shorter categories, generating significantly larger deductions in the early years. Studies typically cost $5,000 to $15,000 and are most valuable on properties worth $500,000 or more.

What happens to depreciation when I sell a rental property?

When you sell a rental property, the IRS recaptures all depreciation you claimed (or were allowed to claim) at a 25% tax rate, separate from your capital gains tax rate. Even if you never claimed depreciation deductions, the IRS treats the full amount as 'allowed or allowable' and taxes you on it anyway. For a property depreciated for 10 years at $4,364/year, the recapture tax would be $10,910 (25% of $43,640 total depreciation claimed).

How does the mid-month convention work for rental property depreciation?

The mid-month convention means the IRS treats your property as if it was placed in service in the middle of the month you acquired it, regardless of the actual date. If you close on a property on March 3rd, you get 9.5 months of depreciation for that first year (mid-March through December). For a $120,000 building, the full-year depreciation is $4,364, but the first-year deduction using mid-month convention for a March purchase would be $3,788 (9.5/12 of $4,364).

Rental Property Depreciation Calculator: 27.5 Year Guide

Rental property depreciation is calculated by dividing the building's cost basis (purchase price plus capitalizable closing costs, minus land value) by 27.5 years using the straight-line method. For a property purchased at $150,000 with land valued at $30,000, the annual depreciation deduction is $4,364 ($120,000 divided by 27.5).

Why depreciation matters more than most landlords realize

Depreciation is a non-cash deduction that reduces your taxable rental income without reducing your actual cash flow. A property collecting $1,150/month in rent might show a $4,884 tax loss on Schedule E after depreciation, even though you pocket positive cash flow every month. That paper loss can offset other income on your tax return, subject to the $25,000 active participation allowance for AGI under $100,000.

The IRS considers depreciation mandatory, not optional. Even if you never claim it, they treat the full amount as "allowed or allowable" when you sell. That means you owe depreciation recapture tax on the entire amount regardless. Every year you skip the deduction is money you hand to the IRS twice: once by not reducing your current taxes, and again when they recapture the amount at sale.

Step-by-step depreciation calculation

Determine your cost basis

Start with the purchase price and add closing costs that get capitalized into basis. These include title insurance, recording fees, transfer taxes, survey fees, and legal fees related to the purchase. Lender fees (origination points, appraisal fees) are generally amortized separately over the loan term. If you paid $150,000 for a property with $4,500 in capitalizable closing costs, your total cost basis is $154,500.

Subtract the land value

Land cannot be depreciated. The IRS requires you to allocate your cost basis between land and building. The most common method is using your county tax assessment ratio. If the county assesses $40,000 for land and $160,000 for improvements on a $200,000 assessment, the land ratio is 20%. Apply that ratio to your cost basis: $154,500 x 20% = $30,900 for land, leaving $123,600 as the depreciable building value. Some investors use an independent appraisal to get a more favorable (lower land) split.

Divide building value by 27.5

The IRS mandates straight-line depreciation over 27.5 years for residential rental property. $123,600 / 27.5 = $4,495 per year. This amount goes on Schedule E Line 18 and Form 4562 (Depreciation and Amortization).

Apply the mid-month convention for year one

The IRS uses a mid-month convention, meaning the property is treated as placed in service at the midpoint of the month you acquired it, regardless of the actual closing date. If you close on July 3rd, you get depreciation from mid-July through December: 5.5 months. First-year depreciation: $4,495 x (5.5 / 12) = $2,064. The same convention applies in the final year when you sell or dispose of the property.

Simplified example without closing costs

For a quick estimate, most investors use the basic formula: (Purchase Price minus Land Value) / 27.5. A $150,000 property with $30,000 land value = $120,000 building / 27.5 = $4,364/year. Adding capitalizable closing costs increases your basis and your annual deduction slightly.

27.5 year depreciation schedule

This table shows cumulative depreciation claimed and remaining depreciable basis over the life of a $120,000 building (using the simplified calculation without closing costs added to basis).

Year	Annual Depreciation	Cumulative Claimed	Remaining Basis
1	$4,364	$4,364	$115,636
5	$4,364	$21,820	$98,180
10	$4,364	$43,640	$76,360
15	$4,364	$65,460	$54,540
20	$4,364	$87,280	$32,720
25	$4,364	$109,100	$10,900
27.5	$2,182*	$120,000	$0

*Year 28 is a partial year (6 months) due to the mid-month convention applied in year 1. The total depreciation over 27.5 years always equals the full building value.

Cost segregation: accelerating depreciation

The default 27.5 year schedule treats the entire building as a single asset. A cost segregation study is an engineering analysis that reclassifies building components into shorter depreciation categories, front-loading your deductions into the early years of ownership.

How components get reclassified

Category	Recovery Period	Examples
Personal property	5 years	Appliances, carpeting, window treatments, certain electrical outlets
Personal property	7 years	Furniture, fixtures, office equipment, security systems
Land improvements	15 years	Landscaping, parking lots, sidewalks, fencing, drainage
Building structure	27.5 years	Foundation, walls, roof, HVAC ductwork, plumbing in walls

Tax impact comparison: standard vs. cost segregation

On a $120,000 building where a cost seg study reclassifies 30% ($36,000) into shorter-lived categories:

Method	Year 1 Depreciation	Years 1 through 5 Total	Tax Savings (24% bracket, 5 years)
Standard 27.5 year	$4,364	$21,820	$5,237
With cost segregation	$14,255*	$51,480	$12,355
Additional benefit	$9,891	$29,660	$7,118

*Includes bonus depreciation on 5-year and 7-year property (currently being phased down). The total depreciation over the full holding period is the same. Cost seg accelerates when you take the deductions, not the total amount.

Cost segregation studies typically cost $5,000 to $15,000 from a qualified engineering firm. They are most cost-effective on properties valued at $500,000 or more, where the accelerated deductions significantly outweigh the study cost. For smaller portfolios, some firms offer desktop studies starting around $1,500 to $3,000.

Depreciation recapture: the tax bill when you sell

This catches many investors off guard

When you sell a rental property, the IRS recaptures all depreciation you claimed (or were allowed to claim) at a 25% tax rate, separate from and in addition to your capital gains tax. This applies even if you never actually claimed the depreciation deduction.

Recapture example with real numbers

You purchased a property for $150,000 ($30,000 land, $120,000 building). After 10 years of ownership, you sell for $210,000.

Calculation	Amount
Original cost basis	$150,000
Total depreciation claimed (10 years x $4,364)	$43,640
Adjusted basis at sale ($150,000 minus $43,640)	$106,360
Sale price	$210,000
Total gain ($210,000 minus $106,360)	$103,640
Depreciation recapture portion (25% rate)	$43,640 x 25% = $10,910
Capital gain portion (15% or 20% rate)	$60,000 x 15% = $9,000
Total tax on sale	$19,910

The depreciation recapture tax of $10,910 is the cost of taking $43,640 in deductions over 10 years. You deducted at your ordinary income rate (22% to 37%) and recapture at a flat 25%. For most investors in the 24% or higher bracket, this trade is favorable: you saved more in annual tax reductions than you pay back at recapture.

1031 exchange defers recapture

A 1031 like-kind exchange defers both capital gains and depreciation recapture tax. The depreciation carries over to the replacement property. You do not eliminate the recapture liability. You defer it until you eventually sell without exchanging.

Five common depreciation mistakes

Depreciating the land. Land has an indefinite useful life and cannot be depreciated. If you depreciate the full purchase price without subtracting land value, you are overstating deductions. The IRS can disallow the excess and charge penalties plus interest. Always allocate between land and building using your county assessment or an independent appraisal.

Ignoring the mid-month convention in year one. New investors often claim a full year of depreciation in the year of purchase. The IRS requires the mid-month convention, which prorates based on the month placed in service. A December purchase only gets 0.5 months of depreciation ($182 instead of $4,364). Claiming the full amount in a December purchase is an immediate audit flag.

Forgetting to add closing costs to basis. Capitalizable closing costs (title insurance, recording fees, transfer taxes, survey costs) increase your depreciable basis. On a $150,000 purchase with $4,500 in qualifying closing costs, skipping this step means underreporting your basis by $3,600 (80% of $4,500, assuming 20% land allocation). Over 27.5 years, that is $131 per year in missed deductions.

Not claiming depreciation, thinking it is optional. Some landlords skip depreciation to "avoid recapture tax later." This is the single most expensive mistake in rental property tax planning. The IRS recaptures depreciation whether or not you claimed it. By not taking the deduction, you lose the annual tax benefit but still owe the recapture tax at sale. On a $120,000 building held for 10 years, that is $43,640 in deductions you never took but still get taxed on.

Using the wrong land/building split. Defaulting to an arbitrary 80/20 split without documentation is risky. The IRS can challenge your allocation if it does not match comparable data. Use your county tax assessment as the baseline. If you want a more favorable split, get a qualified appraisal before filing. The appraisal cost ($300 to $500) pays for itself many times over if it shifts 5% more value to the building.

How DoorVault handles depreciation

DoorVault calculates depreciation when you add a property and tracks it automatically through the life of your ownership.

Calculates annual depreciation on property setup using your purchase price, closing costs, and land allocation. Mid-month convention applied automatically.

Cost segregation component tracking across 5, 7, 15, and 27.5 year schedules. See accelerated and standard depreciation side by side.

Depreciation flows automatically into Schedule E export data. Your CPA gets the correct Line 18 amount per property without manual calculation.

Adjusted basis tracking over time. See remaining depreciable basis and cumulative deductions claimed at any point in your ownership.

Recapture tax projection on every property so you know the tax liability before you list.