Depreciation on a rental condo is a straight-line deduction over 27.5 years: take your total cost, subtract the land value, and divide what’s left by 27.5 to get your annual write-off. You claim it on Schedule E each year and formally report it on Form 4562.1Internal Revenue Service. About Form 4562, Depreciation and Amortization The deduction reduces your taxable rental income without costing you a dollar of cash, but the setup matters. Errors in your first-year numbers compound across the property’s life and resurface as real tax when you sell.
Building Your Cost Basis
Your basis is the purchase price plus the costs of acquiring the property. That includes title insurance, legal fees, transfer taxes, recording fees, and any loan origination points that weren’t deductible as mortgage interest. Capital improvements you make before the unit is first available for rent — new flooring, updated plumbing, a bathroom remodel — also get added to basis.2Internal Revenue Service. Topic No. 704, Depreciation
Some closing-statement items don’t belong in basis. Prepaid property taxes and homeowner’s insurance are deductible operating expenses, not acquisition costs. A tenant’s security deposit is a liability you may have to return, not something you paid.
Splitting Land From Building
The IRS doesn’t allow depreciation on land, so you have to separate the land value from the building value and depreciate only the building portion.3Internal Revenue Service. Publication 527 – Residential Rental Property
The most common method uses your local property tax assessment. If the assessor values the land at 20% and the improvements at 80% of the total assessed value, apply that same 80/20 split to your purchase price. Condos in multi-story buildings usually carry a smaller land allocation than single-family homes because each unit owns only a fractional interest in the underlying land. That means a larger depreciable basis and a bigger annual deduction.
A professional appraisal gives you a more defensible ratio, especially if the assessment looks outdated or your purchase price is far from the assessed value. Keep the assessment records or the appraisal report on file permanently. If the IRS challenges your allocation and you have no documentation, you’ll be stuck with whatever split the auditor calculates.
Pull out any personal property that came with the purchase — furniture, appliances, window treatments — and track it separately. Those items depreciate on a faster schedule than the building.
The 27.5-Year Calculation
Residential rental property depreciates over exactly 27.5 years using the straight-line method under MACRS.4Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System Divide the depreciable basis by 27.5 and that’s your annual deduction.
Say you buy a condo for $350,000. You allocate $70,000 to land and pull out $5,000 for appliances. Your depreciable building basis is $275,000. Your annual depreciation is $275,000 ÷ 27.5 = $10,000. You claim $10,000 in year one, year ten, and year twenty, reporting it on Schedule E alongside your other rental expenses.
The only years that differ are the first year the property is placed in service and the year you sell.
The Mid-Month Convention
MACRS treats real property as placed in service at the midpoint of whatever month it actually enters service.4Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System Only the first and last years are affected.
Place your condo in service in March and you get credit for 9.5 months that first year: half of March plus April through December. On the $10,000 example above, your first-year deduction is $10,000 × (9.5 ÷ 12) = $7,917. Start renting in July and you get 5.5 months, or $4,583 for that first year. The same rule applies in the year you sell. Total depreciation across the holding period still adds up to the full depreciable basis; the convention just trims the bookend years.
Personal Property and Cost Segregation
Items inside the condo that aren’t part of the building structure — refrigerators, washers, dryers, furniture, carpeting — fall into shorter MACRS recovery classes. Most sit in the five-year or seven-year category, which front-loads your deductions compared to lumping everything into the 27.5-year schedule.3Internal Revenue Service. Publication 527 – Residential Rental Property A $3,000 refrigerator depreciated over five years produces $600 per year, or potentially the entire cost in year one if bonus depreciation applies.
A cost segregation study extends this idea to the building itself. An engineer or tax professional identifies components that qualify for shorter recovery periods, such as decorative lighting, certain flooring, specialty cabinetry, and site improvements. Reclassifying part of the building’s value from 27.5 years down to 5 or 15 years generates much larger early deductions. The One Big Beautiful Bill restored 100% first-year bonus depreciation for qualified property, which makes cost segregation especially valuable when you want to accelerate write-offs.5Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction
These studies aren’t free. They run into the thousands of dollars, and the payoff depends on how much value can realistically be reclassified. For a high-value condo with significant interior finishes, the tax savings can more than cover the cost. For a small, basic unit, the math may not work.
If You Lived There First
Converting a personal residence to a rental changes how you calculate the starting number. Your depreciable basis is the lesser of your adjusted basis or the fair market value on the conversion date.6Internal Revenue Service. Publication 551 – Basis of Assets The rule prevents you from depreciating unrealized appreciation you never paid tax on.
Adjusted basis is what you originally paid, plus capital improvements while you lived there, minus any casualty losses you claimed. If the condo appreciated, you use the lower adjusted basis. If it declined, you use the lower fair market value.
An example: you bought for $250,000 and added a $30,000 kitchen, giving you an adjusted basis of $280,000. On the conversion date, the fair market value is $320,000. Because FMV is higher, you depreciate based on $280,000 minus the land allocation. Flip the scenario and let FMV drop to $240,000, and you use $240,000 minus land, losing the ability to depreciate the full amount you invested. An appraisal on the conversion date protects you either way. The 27.5-year clock starts on that conversion date, not the date you originally bought.
HOA Fees and Special Assessments
Regular monthly HOA dues on a rental condo are fully deductible operating expenses in the year you pay them. The IRS specifically allows condo owners to deduct dues and assessments paid for maintenance of common elements.3Internal Revenue Service. Publication 527 – Residential Rental Property They go on Schedule E alongside property taxes, insurance, and management fees. HOA fees are not depreciated; they reduce your rental income dollar for dollar.
Your fractional interest in common areas — hallways, lobbies, the roof, elevators, parking structures — is already inside your purchase price and your depreciable basis. It depreciates along with the rest of the building over 27.5 years, with no separate calculation required.
Special assessments require more analysis. The tax treatment depends on what the money pays for, and the dividing line is the same one that applies to any spending on the property: repairs are deductible now, improvements must be capitalized.7eCFR. 26 CFR 1.263(a)-1 – Capital Expenditures; In General Assessments for repainting common areas, patching a parking lot, or fixing a broken elevator are deductible repairs. Assessments for a new roof, a lobby renovation, or a replacement boiler get added to your depreciable basis and recovered over time.8Internal Revenue Service. 9Internal Revenue Service. Publication 925 – Passive Activity and At-Risk Rules
Above the phaseout, the depreciation deduction doesn’t vanish. It gets suspended. Unused passive losses carry forward indefinitely, offset passive income in future years, and release in full when you sell the property, at which point they can be deducted against the gain. Taxpayers who work full-time in real property activities may qualify as real estate professionals and escape these limits entirely, but W-2 employees with non-real-estate day jobs almost never meet the more-than-50% test.
What Happens When You Sell
Every dollar of depreciation reduces your condo’s adjusted basis, which increases the taxable gain at sale. The IRS doesn’t let you take ordinary deductions during ownership and pay only capital gains rates on the equivalent amount at exit. Accumulated depreciation gets “recaptured” and taxed at a maximum federal rate of 25% as unrecaptured Section 1250 gain.10Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed Any gain above the depreciation amount is taxed at the regular long-term capital gains rates of 0%, 15%, or 20%.11Internal Revenue Service. TD 8836 – Capital Gains, Installment Sales, Unrecaptured Section 1250 Gain
Buy for $300,000, allocate $50,000 to land, depreciate a $250,000 building. After ten years you’ve claimed $90,909 in depreciation, dropping your adjusted basis to $209,091. You sell for $450,000.
- Total gain: $450,000 − $209,091 = $240,909
- Recapture: $90,909 taxed at up to 25%, or up to $22,727 in federal tax
- Remaining $150,000 taxed at your long-term capital gains rate
High-income sellers pay an additional 3.8% Net Investment Income Tax on both pieces once modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly). The thresholds are not indexed for inflation.12Internal Revenue Service. Questions and Answers on the Net Investment Income Tax Report the sale on Form 4797 and Schedule D.13Internal Revenue Service. Instructions for Form 4797
Why Skipping Depreciation Backfires
Not claiming depreciation doesn’t spare you from recapture. The IRS reduces your basis by the depreciation you were entitled to claim, whether you actually claimed it or not. That’s the “allowed or allowable” rule, and your basis drops by whichever figure is greater.14Internal Revenue Service. Depreciation Recapture15Office of the Law Revision Counsel. 26 USC 1016 – Adjustments to Basis
Own a rental for ten years without claiming depreciation and the IRS still calculates your gain as if you had. You’ll owe recapture tax on deductions you never took. There is no strategic reason to leave depreciation on the table. Always claim it.
Fixing Prior-Year Errors
If you’ve been depreciating your condo incorrectly — wrong basis, wrong recovery period, or nothing claimed at all — the fix is not amending old returns one by one. You file Form 3115 to request a change in accounting method.16Internal Revenue Service. Instructions for Form 3115
The form triggers a Section 481(a) adjustment: a one-time catch-up that reconciles what you claimed against what you should have claimed across all prior years. Underclaim and you get a lump-sum deduction in the year you file. Overclaim and you owe the difference. Most depreciation corrections fall under the IRS’s automatic consent procedures, so there’s no user fee and no ruling-letter wait. The calculation requires reconstructing your entire depreciation history, so most owners have a tax professional handle it. Given the allowed-or-allowable rule, sooner is better than later.