Tax Concepts
Real Estate Depreciation Explained
Depreciation is an IRS tax deduction that lets investors recover the cost of income-producing real property over time. It reduces taxable income without spending additional cash — making it one of the most powerful benefits of real estate investment.
Depreciation Basics
The IRS allows owners of income-producing real property to deduct a portion of the property's cost each year as depreciation — representing the building's theoretical wear and tear over time.
Residential rental property depreciates over 27.5 years using straight-line depreciation. Commercial property depreciates over 39 years. Land is never depreciable — only improvements.
Annual depreciation = (Cost of Property - Land Value) ÷ Useful Life. A $500,000 residential rental with $100,000 in land value depreciates at $400,000 ÷ 27.5 = $14,545/year.
Depreciation Quick Reference
Residential Rental
27.5-year straight-line depreciation. Applies to single-family rentals, apartments, and other residential income properties.
Commercial Property
39-year straight-line depreciation. Applies to office buildings, retail, industrial, and other nonresidential income property.
Land
Never depreciable. You must allocate a portion of purchase price to land and exclude it from the depreciable basis.
Depreciation Recapture
When you sell a depreciated property, the IRS recaptures prior depreciation deductions at a 25% tax rate (unrecaptured Section 1250 gain).
Depreciation FAQ
Can you depreciate your primary residence?
No. Depreciation applies only to income-producing or business-use real property. Your primary home cannot be depreciated.
What is depreciation recapture?
When you sell a property, the IRS 'recaptures' the depreciation deductions you've taken and taxes them at up to 25% (Section 1250 recapture). This is in addition to any capital gains tax on appreciation above the original basis.
Does a 1031 exchange avoid depreciation recapture?
A properly structured 1031 exchange defers both capital gains and depreciation recapture — but doesn't eliminate them. When the replacement property is eventually sold without another 1031, all deferred gains and recapture become taxable.
What is accelerated depreciation?
Accelerated methods like bonus depreciation and cost segregation allow investors to front-load depreciation deductions, writing off certain components of a building in fewer years. This requires a cost segregation study and tax professional guidance.