Straight-Line Depreciation
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Real estate depreciation allows investors to deduct the cost of a rental property over its useful life (27.5 years for residential, 39 years for commercial in the US), reducing taxable rental income even if the property is appreciating in value.
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Tip: Keep meticulous records of capital improvements (new roof, HVAC, etc.) — they can be depreciated separately or expensed immediately under Section 179 or bonus depreciation, providing larger upfront deductions.
- 1Annual depreciation = (Purchase price − land value) / 27.5 years
- 2Land cannot be depreciated — only the building (typically 70–80% of purchase price)
- 3Depreciation is a "paper" deduction — it reduces taxable income without a cash outflow
- 4When you sell, depreciation is "recaptured" and taxed at up to 25%
$400,000 rental, $80,000 land value, 27.5 years=$11,636/year depreciation deduction($400k−$80k)/27.5
$1,200 monthly rent, $11,636 depreciation, 25% tax bracket=Save $2,909 in taxes/yearEffective after-tax rent income boosted significantly
| Event | Tax Treatment | Rate (2024) |
|---|---|---|
| Annual depreciation deduction | Reduces ordinary income | Up to 37% |
| Property sale — depreciation recapture | Taxed as ordinary income | Up to 25% |
| Property sale — capital gain beyond | Long-term capital gains | 0%, 15%, or 20% |
| 1031 exchange | Defer all taxes | Must reinvest in like-kind property |
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Fun Fact
Real estate depreciation is one of the few tax benefits available to high earners. Under certain conditions, "real estate professional" status allows unlimited depreciation deductions against any income — a strategy used extensively by wealthy investors.
References
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