Residential rental properties follow a 27.5-year depreciation schedule under IRS rules. Each year, you deduct a portion of the building’s value as a non-cash expense that reduces your taxable rental income. This isn’t optional. The IRS expects you to take it.

You can only depreciate the building, not the land underneath it. When you buy a rental property for $350,000, part of that price covers the land and part covers the structure. A common method for splitting them is using your property tax assessment. If the assessment shows 25% land and 75% improvements, apply that ratio to your purchase price. You can also get an appraisal or research comparable land sales in the area if the tax assessment doesn’t seem accurate.

Your depreciable basis includes the building portion of the purchase price plus certain closing costs like title insurance, legal fees, and recording fees. If you paid $350,000 with a 75% building allocation, your starting basis is $262,500. Divide by 27.5 years and you get roughly $9,545 in annual depreciation.

Depreciation starts when the property is placed in service, meaning when it’s ready and available for rent. Close in February but spend two months renovating before listing it? Depreciation starts when the renovations finish and the property is rentable. The first year uses the mid-month convention, so an April start gives you 8.5 months of depreciation for that calendar year.

Capital improvements add to your depreciable basis and get their own 27.5-year schedule. A new roof, furnace, or bathroom remodel increases your depreciable assets. Repairs like fixing a broken garbage disposal or repainting walls are expensed immediately in the year you pay for them. The line between improvements and repairs matters because it affects when you get the tax benefit.

Real estate investors with multiple properties need to track separate depreciation schedules for each one. Every property has its own basis, start date, and improvement history. This gets complicated quickly, which is why many landlords work with Merrimack Valley bookkeepers who understand rental property accounting.

Here’s what catches people off guard: depreciation is not optional. Even if you never claim it, the IRS assumes you did when you sell the property. They’ll calculate depreciation recapture and tax you at 25% on that amount regardless of whether you benefited from the deductions. Skipping depreciation just means paying the recapture tax without having received the annual deductions. Take the depreciation every year.

Keep your purchase documents, closing statements, and receipts for every improvement. You’ll need these to calculate your adjusted basis when you sell and to support your depreciation claims if audited. Good records now prevent expensive problems later.