How does depreciation work on a rental property?

Residential rental property depreciates over 27.5 years straight-line. Land does not depreciate. Depreciation is a paper deduction that reduces taxable rental income.

Depreciation is the IRS's recognition that buildings wear out over time. For residential rental property, the depreciation period is 27.5 years straight-line. The property's purchase price is allocated between land (does not depreciate) and improvements (depreciable). Land is typically 15-25% of the total purchase price depending on market; the remainder depreciates. Example: $400K purchase, 80% allocation to building = $320K depreciable basis. Annual depreciation = $320K / 27.5 = $11,636. This is deducted from rental income on Schedule E. Cost segregation studies can accelerate depreciation by reclassifying components (carpet, appliances, parking lot) into 5-year, 7-year, and 15-year property. A typical residential cost seg study can move 15-25% of basis into shorter-lived classes, producing front-loaded deductions. Bonus depreciation (currently 60% in 2024, phasing down) lets you deduct a portion of qualifying short-life property in year one. Recapture matters at sale: when you sell the property, accumulated depreciation is recaptured at a 25% federal rate (plus state). 1031 exchange defers recapture to the next property; sale without 1031 triggers it.