You’re probably wondering: does depreciation actually lower my tax bill, and how do I know when it starts? The straight answer is yes, it does, but only if you claim it correctly and understand the three foundation rules.
Only the Building Depreciates
The most fundamental rule is this: only the building depreciates. Land never depreciates, ever. When you buy a rental property, you are buying both the land and the structure on it, but the IRS treats them entirely differently for tax purposes.
The reason is logical. Land does not wear out or get used up over time. A building does: the roof ages, the systems wear, the interior deteriorates. But land stays land.
Here is the practical problem this creates: if you buy a $200,000 rental and don’t know what piece of that is land versus building, you might accidentally depreciate the land portion, which is wrong and can trigger IRS issues on audit.
Key takeaway: your first job is to split the purchase price between land and building. Do not guess.
How to Split Land from Building
Most investors use one of two methods: county assessment records or a professional appraisal. County assessments are free and usually available online. They show the assessed value of the land and the building separately, and you can use that split to proportion your purchase price.
Example: you bought a $200,000 property. The county assessor values the land at $35,000 and the building at $165,000. That is roughly an 17.5% land split and 82.5% building split. If you paid $200,000, you would assign $35,000 to land (non-depreciable) and $165,000 to the building (depreciable).
In many portfolios, land makes up 15% to 25% of total value, though this varies by location and property type. Urban infill properties or commercial real estate in expensive markets can skew higher. Rural properties or properties with larger lot sizes skew lower.
If the county assessment seems unreliable or the property is unique, a professional appraisal done by a licensed appraiser gives you documentation the IRS respects. An appraisal costs money, but if you own multiple properties or if the land split is unclear, it is worth the investment.
Key takeaway: use county records for routine splits, and pay for an appraisal if the situation is complex or the stakes are high.
Recovery Periods: 27.5 Years for Residential, 39 Years for Commercial
Once you have isolated the depreciable building portion, the next rule is how long you depreciate it over. This is called the recovery period, and it depends on what the property is.
A residential rental (a single family home, a duplex, an apartment) depreciates over 27.5 years. A commercial property (an office building, a retail storefront, an industrial warehouse) depreciates over 39 years. Short-term rentals are a special case: when a unit is used on a transient basis – a hotel- or motel-type use, where more than half the units are rented to transient guests – it is generally not treated as a “dwelling unit,” so it is depreciated on the 39-year nonresidential schedule rather than the 27.5-year residential schedule, even though the property is a residence.
This matters because it affects your annual depreciation deduction. On a $165,000 depreciable building portion, your annual depreciation is $165,000 divided by 27.5 years (or 39 years), split into equal pieces across each year of ownership.
For residential: $165,000 / 27.5 = $6,000 per year. For commercial: $165,000 / 39 = $4,231 per year.
The difference compounds over time, which is why commercial properties offer lower annual deductions but also lower recapture taxes if you later sell.
Key takeaway: know your property’s classification, because it directly controls how much you can depreciate each year.
Depreciation Starts When the Property is Placed in Service
Here is where many owners lose money by getting the start date wrong. Depreciation does not begin on the purchase date. It begins when the property is placed in service, meaning it is ready and available to rent.
Example: you bought a property in December 2025 for $200,000, but it needed repairs. You closed the purchase in December, spent January and most of February renovating, and had your first tenant move in March 1, 2026. Depreciation starts March 1, 2026, not December 2025.
This seems like a small distinction, but it is critical. If you claim depreciation starting in December 2025 when the property was not yet rentable, the IRS can adjust that on audit. Worse, you would have claimed a deduction for a period when you were not actually generating income from the property.
The “ready and available” standard means the property is in condition to rent and you are actively marketing it. You do not need to have an actual tenant; you just need to show that the property was available for rental as of a specific date.
How do you prove this? Keep documentation: photos showing the property condition, your lease ads or listing platforms, correspondence with property managers, renovation completion receipts. This is your audit defense.
Key takeaway: never start depreciation before the property is actually ready to rent, and keep records that prove the date.
Depreciation is a Non-Cash Paper Loss
This is the part that surprises many owners. Depreciation can create a tax loss even when the property is generating positive cash flow. This is because depreciation is a “non-cash” deduction. You are not spending money on depreciation; you are deducting the decline in the building’s value over time.
Example: a property rents for $2,000 per month and costs $1,200 per month in taxes, insurance, maintenance, and management. Your cash flow is positive: $800 per month or $9,600 per year. But if depreciation is $6,000 per year, your taxable income for the year is $9,600 minus $6,000 = $3,600. If other deductions (interest on a mortgage, capital improvements, repairs) push you further, you could have a taxable loss on a property that paid you $9,600 in cash.
This is one of the core reasons real estate is so tax efficient: you get the deduction without paying the cash. The property itself is paying down the mortgage with tenant money, and you are reducing taxes at the same time.
However, this benefit eventually comes due. When you sell the property, you have to recapture the depreciation you took. For the building itself (real property depreciated straight-line), this “unrecaptured Section 1250 gain” is taxed at a maximum federal rate of 25%. If you used cost segregation, the personal-property components (chiefly the 5- and 7-year property) are Section 1245 property recaptured at ordinary income rates, not capped at 25%. Note that many 15-year assets are land improvements, which are Section 1250 property rather than Section 1245. So the depreciation deduction now is trading for a higher tax bill later. That is not a bad deal, especially if you use a 1031 exchange to defer the recapture.
Key takeaway: depreciation is a powerful non-cash deduction, but it comes with recapture tax later, so plan ahead.
FAQ
Q: When does depreciation start: the day I close or the day my first tenant arrives?
A: It starts when the property is placed in service, which means ready and available for rent. If you close in December but do not finish repairs until February, depreciation starts in February. The key is that the property must be in rentable condition and you must be marketing it.
Q: Can I depreciate land as part of my building depreciation?
A: No. Land never depreciates. If you try to include land in your depreciation, you risk an audit adjustment and losing the deduction entirely. Always split land and building using county records or an appraisal.
Q: I bought my property years ago and never claimed depreciation. Can I fix that now?
A: Yes, using IRS Form 3115 (change in accounting method). You can catch up the depreciation you failed to take in prior years without filing an amended return for each year. Missed depreciation produces a favorable (negative) Section 481(a) adjustment, which you claim as a deduction in the year of change; there is no interest charge for catching up depreciation you under-claimed. This cumulative adjustment saves you time and money, and it is well worth doing.
Q: Does depreciation reduce my cash flow or just my taxes?
A: Only your taxes. Depreciation is a non-cash deduction, so it does not come out of your bank account. Your cash flow is still the same, but your taxable income is lower. This makes real estate unique: you get a tax deduction without spending cash.
Next Steps
Depreciation is the foundation of real estate tax efficiency, but only if you claim it the right way: split land from building, use the correct recovery period, and start it on the placed-in-service date. If you inherited a property or never claimed depreciation before, do not leave money on the table. A professional can help you calculate what you missed and catch it up.
If you want to accelerate even more depreciation in your first year, cost segregation might be worth looking at. That strategy reclassifies property components into shorter lives, front-loading your deductions. A lot of investors combine cost seg with bonus depreciation to multiply their year-one tax benefits.
Join our free REI Tax Hack Facebook community if you want to learn more about this strategy and share your questions with other real estate investors. If you want personalized guidance on your specific properties, Malabute and Company CPAs is here to help you plan year round, not just at tax time.
Internal Links
- Up to the pillar: The Complete Guide to Depreciation and Cost Segregation
- Across to siblings: The Most Common Depreciation Mistakes Rental Owners Make, What is Cost Segregation
- To a related pillar: Real Estate Professional Status and the Short-Term Rental Loophole (for using depreciation losses against active income)
If you want to talk through how this applies to your properties, book a discovery call.