Home / Glossary / Depreciation
Depreciation
A tax deduction that accounts for the wear and tear of a property over its useful life.
Definition
Depreciation is an IRS-allowed tax deduction that lets property owners write off the cost of residential rental buildings over 27.5 years (or 39 years for commercial property). Only the structure is depreciated — land is excluded. For a $400,000 property where the land is worth $100,000, you can depreciate $300,000 over 27.5 years, yielding roughly $10,909 per year in paper losses. This deduction reduces taxable income even though no actual cash is spent. Depreciation is one of real estate's most powerful tax advantages and is often what makes rental property more tax-efficient than stocks or bonds.
How This Relates to DSCR Loans
While depreciation does not affect your DSCR calculation, it significantly improves your after-tax return on DSCR-financed properties.
Related Terms
Cost Segregation
A tax strategy that accelerates depreciation by reclassifying building components into shorter-lived asset categories.
Bonus Depreciation
A tax provision allowing immediate deduction of a large percentage of qualifying asset costs in the first year.
Depreciation Recapture
The IRS requirement to pay taxes on accumulated depreciation deductions when a property is sold.
Passive Income
Income from rental properties or businesses in which the taxpayer does not materially participate.
Compare rates from hundreds of lenders instantly. No personal info required.