Use this calculator to estimate the annual depreciation deduction for your rental property. Depreciation allows you to recover the cost of income-producing property over its useful life, reducing your taxable income.
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Understanding Rental Property Depreciation
Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property over the time you use the property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.
What Can Be Depreciated?
Generally, you can depreciate property that:
Is owned by you.
Is used in your income-producing activity (like a rental property).
Has a determinable useful life (it wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes).
Is expected to last more than one year.
Crucially, land cannot be depreciated because it is not considered to wear out, decay, or get used up. Therefore, when you purchase a rental property, you must allocate the total purchase price between the land and the building. Only the value attributed to the building (and other improvements) is depreciable.
Depreciation Methods and Recovery Periods
For most rental properties, the Modified Accelerated Cost Recovery System (MACRS) is used. Under MACRS, you generally use the Straight-Line Depreciation method for real property. The IRS specifies recovery periods:
Residential Rental Property: 27.5 years
Non-Residential Real Property: 39 years
The recovery period begins when the property is placed in service (ready and available for use) and ends after the specified number of years.
How the Calculator Works
This calculator uses the straight-line depreciation method, which is standard for rental properties. Here's a breakdown of the inputs and calculations:
Total Property Purchase Price: This is the full amount you paid for the property, including the land.
Estimated Land Value: You must subtract the value of the land from the total purchase price to determine the depreciable basis. This value can often be found on your property tax assessment or by consulting a real estate appraiser.
Property Type: Select whether your property is residential (e.g., single-family home, duplex, apartment building) or non-residential (e.g., commercial office, retail space). This determines the recovery period (27.5 or 39 years).
Month Placed in Service: Depreciation is prorated in the first year based on the month the property was placed in service. The IRS uses a "mid-month convention," meaning property placed in service at any time during a month is considered placed in service in the middle of that month. Our calculator uses a simplified proration for the first year.
Example Calculation:
Let's say you purchased a residential rental property for $300,000. The estimated land value is $60,000, and you placed it in service in July.
Full Annual Depreciation: $240,000 / 27.5 years = $8,727.27 per year
First Year Depreciation (July): For a property placed in service in July, you can typically claim 5.5 months of depreciation in the first year (July through December, using mid-month convention). This is approximately 5.5/12 of the full annual amount.
$8,727.27 * (5.5 / 12) = $3,997.98 (Note: Our calculator uses a slightly different simplified proration for the first year, (13 – month_number) / 12, which for July (month 7) would be (13-7)/12 = 6/12 = 0.5, resulting in $4,363.64. Always consult IRS publications or a tax professional for exact figures.)
Depreciation is a powerful tax benefit for real estate investors. However, it's important to keep accurate records and consult with a tax professional to ensure you are correctly calculating and claiming your deductions.