To calculate straight-line depreciation in real estate, divide the building’s depreciable basis by its recovery period: 27.5 years for residential rental property or 39 years for commercial property. The depreciable basis is your purchase price plus acquisition closing costs, minus the value allocated to land. The first and last years are prorated using the mid-month convention, which treats the property as placed in service at the middle of the month you actually put it into rental use.
The formula is short. The work is in the inputs.
Step 1: Figure Your Depreciable Basis
Start with what you paid for the property. Add the closing costs that are tied to acquiring it: title insurance, legal fees, recording charges, and transfer taxes. Those costs increase your basis and therefore your annual deduction.
Then take land out. Land does not depreciate under any method.1Internal Revenue Service. Topic No. 704, Depreciation Only the portion of your cost attributable to the building and other improvements counts as depreciable basis.
The standard way to split land from building is the assessment-ratio method described in IRS Publication 551: multiply your total cost by a fraction whose numerator is the fair market value of the building and whose denominator is the fair market value of the whole property. If you don’t have a separate appraisal, the assessed values from your county property tax records work as the ratio.2Internal Revenue Service. Publication 551, Basis of Assets A property assessed at $300,000 with $60,000 attributed to land gives you an 80% building ratio, so 80% of your total cost is depreciable.
If the assessment looks stale or the property was recently rezoned, pay for an appraisal that breaks out land and building separately. A few hundred dollars now sets the number you’ll use for decades.
If You Didn’t Buy the Property in a Straight Purchase
Two situations shift the starting basis and catch owners by surprise.
Inherited property gets a stepped-up basis equal to fair market value on the date of the previous owner’s death.3Internal Revenue Service. Gifts and Inheritances The original purchase price is irrelevant. Keep your reported basis consistent with any Schedule A to Form 8971 you received from the estate; a mismatch can trigger an accuracy-related penalty.
Converting your former home into a rental works the other way. Your depreciable basis is the lesser of the property’s fair market value or your adjusted basis on the date of conversion.4Internal Revenue Service. Publication 527, Residential Rental Property Adjusted basis means what you paid plus permanent improvements, minus any casualty loss deductions. If the market fell after you bought, you’re stuck starting from the lower current value.
Step 2: Pick the Right Recovery Period
For real property, MACRS gives you only two choices:5Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
- Residential rental property: 27.5 years
- Nonresidential real property: 39 years
Residential rental means a building where 80% or more of gross rental income comes from dwelling units. Hotel and motel rooms where more than half the units serve transient guests are not dwelling units.6Legal Information Institute. 26 U.S. Code 168(e)(2) – Residential Rental Property Definition Office buildings, retail, warehouses, and mixed-use buildings that fall below the 80% threshold use 39 years.
The clock starts when the property is “placed in service,” meaning ready and available for rent. A vacant but rent-ready unit qualifies; you don’t need a signed lease. The classification locks in at that point. If you later convert a residential building to commercial use, you keep the original 27.5-year period.
Under MACRS, salvage value is treated as zero, so you don’t subtract any estimated residual before dividing.7Office of the Law Revision Counsel. 26 U.S. Code 168(b)(4) – Salvage Value Treated as Zero
Step 3: Run the Formula
Depreciable basis ÷ recovery period = annual depreciation.
A residential building with a $275,000 depreciable basis produces $10,000 a year ($275,000 ÷ 27.5). A commercial building with a $780,000 depreciable basis produces $20,000 a year ($780,000 ÷ 39).
That’s the full-year number. Your first and last years will always be partial.
The Mid-Month Convention
All real property under MACRS uses the mid-month convention. The property is treated as placed in service at the midpoint of the month you actually started renting.8Office of the Law Revision Counsel. 26 U.S. Code 168(d)(2) – Mid-Month Convention
Say you place a residential property in service in August, and the full annual figure is $10,000. August counts as half a month, so you get 4.5 months of service in year one: half of August plus September through December. First-year deduction: $10,000 × 4.5/12 = $3,750. For a March placement, you’d get 9.5 months (half of March plus April through December): $10,000 × 9.5/12 = $7,917.
Every full year between the first and last claims the whole annual amount. The final year of the recovery period picks up whatever fractional amount remains, so total deductions equal exactly your depreciable basis.
A Complete Worked Example
You buy a duplex for $340,000 in June. Closing costs add $6,000, giving you a total cost basis of $346,000. The county assessment attributes 18% of value to land, so your depreciable basis is $346,000 × 0.82 = $283,720. Divide by 27.5: your full-year deduction is $10,317.
June placement means 6.5 months in year one: $10,317 × 6.5/12 = $5,588. You claim $5,588 in year one, the full $10,317 in each of years two through twenty-seven, and a partial amount in year twenty-eight to bring the total to $283,720.
What Happens to Money You Spend After Purchase
Post-purchase spending splits into two buckets, and only one of them changes your depreciation.
Repairs keep the property in its current condition (fixing a leak, patching drywall, repainting). They come off in full in the year you pay.
Capital improvements add value, extend useful life, or adapt the property to a new use (a new roof, HVAC replacement, kitchen remodel). They get added to depreciable basis and recovered over the same 27.5 or 39 years.
The IRS test is whether the expense is a betterment, adaptation, or restoration (“BAR”). A few safe harbors clear up close calls: items costing $2,500 or less can be expensed under the de minimis safe harbor; landlords with buildings of $1 million or less in unadjusted basis can expense up to $10,000 in annual improvements (or 2% of the building’s unadjusted basis, whichever is less); routine maintenance expected to recur within 10 years for buildings can also be deducted currently.
Getting this wrong is quietly expensive. A $15,000 amount taken as a current repair is worth far more in present-value tax dollars than the same $15,000 stretched across 27.5 years.
Where the Number Goes on Your Return
The calculation is documented on IRS Form 4562, “Depreciation and Amortization.”9Internal Revenue Service. Form 4562 – Depreciation and Amortization You file Form 4562 in the year you place the property in service. After that, you generally don’t file a new 4562 for the same asset unless you add new depreciable property, but you still recalculate the annual amount and report it on Schedule E.
The depreciation total from Form 4562 flows to Schedule E (“Supplemental Income and Loss”), reduces your net rental income, and then feeds your Form 1040. If depreciation and other expenses exceed rental revenue, you have a paper loss; the passive activity rules under Section 469 determine how much of that loss you can actually use in the current year against non-passive income.10Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited Those limits govern deductibility, not the calculation itself.
If You Missed Depreciation in Prior Years
Don’t try to fix it with amended returns. Not claiming depreciation is treated as using an incorrect accounting method, so the correction goes on Form 3115, “Application for Change in Accounting Method,” filed with your current-year return.11Internal Revenue Service. Instructions for Form 3115 It lets you recalculate all the depreciation you should have taken and claim the entire catch-up as a single Section 481(a) adjustment in the current year, even for years that are otherwise closed by the statute of limitations.
Why You Can’t Just Skip Depreciation
When you sell, the IRS taxes the depreciation you claimed as unrecaptured Section 1250 gain at a maximum federal rate of 25%.12Internal Revenue Service. Topic No. 409, Capital Gains and Losses The recapture calculation uses the depreciation you were allowed to take, whether or not you actually claimed it. Skipping depreciation to keep your basis high doesn’t help at sale: the IRS assumes you took it anyway.
You report the recapture portion of the gain in Part III of Form 4797.13Internal Revenue Service. Instructions for Form 4797 A 1031 like-kind exchange can defer both capital gain and recapture into the replacement property, but the recapture doesn’t disappear; it follows the new asset.
Because the tax is owed either way, claiming your annual straight-line deduction is the only sensible move. The formula and the inputs above are what determine that number.