Find your closing statement and your first county assessment notice. The assessment splits the property’s value between land and improvements, and that ratio is the most common defensible way to split your purchase price the same way. Do that one thing and you have the input every other depreciation question depends on.
Depreciation is the deduction landlords take every year, benefit from most, and understand least. It is not complicated. It is just unfamiliar, because nothing else in personal finance works this way.
What it is
You bought a building that will wear out. The tax code lets you deduct that wearing out a slice at a time, over a fixed number of years, whether or not the building actually declined in value and whether or not you spent a dollar that year.
That last part is what makes it strange. Depreciation is a deduction with no cash behind it. It is also why a rental can show a tax loss in a year it put money in your pocket.
Land is not part of it
You cannot depreciate land. Publication 527 is direct about it: land does not wear out, become obsolete, or get used up. Clearing, grading, planting, and landscaping are usually part of the cost of land too, so they do not go on the building’s schedule either.
This is the step people skip, and skipping it inflates every year’s deduction until someone notices. Two workable approaches:
- The assessment ratio. Your county assessor already values land and improvements separately. Apply that same ratio to what you paid.
- An appraisal. More expensive, more defensible, and worth it on a large purchase or an unusual lot.
Whichever you use, keep the document. The split is an input you will be relying on for twenty-seven years.
27.5 years, and what the mid-month convention does
Residential rental property is recovered over 27.5 years under the General Depreciation System. Straight-line, in even slices, with one wrinkle at each end.
The wrinkle is the mid-month convention. All residential rental property uses it, and it treats the property as placed in service at the midpoint of whatever month it actually started. Buy in February and your first year gets ten and a half months of depreciation, not eleven and not twelve.
Publication 527 works this exact case. A building with a $160,000 basis placed in service in February of year one uses a table percentage of 3.182 percent, which is $5,091 for that first year. A full year on the same basis would be about $5,818. The convention is not a rounding error.
It also runs at the other end. The year you sell, you get a partial year, calculated the same way.
The other clocks running inside the building
Not everything in a rental sits on the 27.5-year schedule. Publication 527’s recovery period table gives shorter lives to things that wear out faster:
- Appliances such as stoves and refrigerators: 5 years
- Carpets: 5 years
- Furniture used in the rental: 5 years
- Computers and peripheral equipment: 5 years
- Office furniture and equipment such as desks and files: 7 years
A refrigerator bought in year four is a new 5-year asset, not an addition to the building. So is the carpet you replaced after a rough tenancy, assuming it was a replacement rather than part of a larger improvement project.
Additions and improvements follow a different rule. A new roof is depreciated over the same recovery period as the property it was added to, determined as if the property were placed in service when the addition was. Same 27.5-year life, new start date. Whether the work was an improvement at all is the question that comes first.
ADS, briefly
There is a second system, the Alternative Depreciation System, which runs residential rental property over 30 years, or 40 years for property placed in service before January 1, 2018. Appliances and carpets stretch to 9 years under it.
Most small landlords never elect ADS. You may be required to use it in specific situations, which is one of the things a preparer checks. Knowing it exists is enough.
The part that shows up when you sell
Every dollar of depreciation you take reduces your basis in the property. A lower basis means a larger gain when you sell, and the portion attributable to depreciation is taxed under its own rules rather than at ordinary capital gain rates.
Which leads to the mistake worth naming: skipping depreciation does not avoid this. The adjustment on sale is based on depreciation allowed or allowable, so a landlord who never claimed it can end up paying as if they had. Not claiming it is the worst available outcome.
If you have owned a rental for years and have never seen a depreciation schedule, that is a conversation to have with a CPA now rather than at closing.
What to keep
Depreciation is the one deduction where the records outlive the tenants. Keep the closing statement, the land and building split with whatever supports it, the invoice and in-service date for every appliance and improvement, and the schedule itself. The IRS record retention guidance keeps property records alive until the period of limitations expires for the year you dispose of the property, which is a long time after the year you bought it. The receipts checklist covers how long, and for what.
Keeping improvement invoices attached to the unit rather than in a folder is most of the work. Accounting in LeaseRooster keeps the expense on the property, and the tax season checklist is where the schedule gets reviewed each year.
This is general information, not legal or tax advice. Rules change and local ordinances vary. Confirm current requirements with your city, county, or an attorney before you act, and talk to a CPA about your own return.