What Is Straight-Line Depreciation?
Straight-line depreciation spreads your rental property's depreciable value over 27.5 years. The formula: (cost basis minus land value) ÷ 27.5 = annual deduction. Land doesn't depreciate — it's typically 15–30% of purchase price, so on a $250,000 property with 20% land ($50,000), you'd depreciate $200,000 ÷ 27.5 ≈ $7,273/year. You start when the property is "placed in service" (usually at closing). When you sell, you'll owe depreciation recapture at 25% on the amount you've taken. Cost segregation accelerates deductions by reclassifying components into shorter MACRS recovery periods — but straight-line is the baseline.
Straight-line depreciation is the default IRS method for depreciating residential rental property: you deduct the depreciable basis (cost minus land) evenly over 27.5 years, with no front-loading or acceleration.
At a Glance
- What it is: Default IRS depreciation method for residential rental — even deductions over 27.5 years
- Why it matters: Reduces taxable rental income every year without spending cash
- Formula: (Cost basis − land value) ÷ 27.5 = annual depreciation
- Land exclusion: Land doesn't depreciate; typically 15–30% of purchase price
- At sale: Depreciation recapture at 25% on total depreciation taken
Annual Depreciation = (Cost Basis - Land Value) / 27.5 years
How It Works
Cost basis. Your depreciable basis is what you paid for the property (purchase price plus closing costs that add to basis, minus land value). Improvements you make after purchase also add to basis when placed in service. Land is excluded because it doesn't wear out.
Land value. The IRS doesn't give a fixed rule; common approaches: (1) use the tax assessor's land/value ratio from the property card, (2) get an appraisal that allocates land vs improvements, or (3) use a rule of thumb (e.g., 20% land for typical suburban residential). Be conservative — overstating land reduces your depreciation and can invite scrutiny.
Placed in service. Depreciation starts when the property is ready and available for rent. For a purchase, that's usually the closing date. For a renovation, it's when the work is substantially complete. The IRS uses the "mid-month convention" for real property: you get a half-month of depreciation for the month you place it in service. So if you close March 15, you get depreciation from March 15–31 in year one.
Recapture. When you sell, the IRS "recaptures" the depreciation you've taken — it's taxed as ordinary income up to 25%. It's not a penalty; it's the IRS taking back the benefit you received. Plan for it in your exit strategy.
Real-World Example
Lisa: $250,000 duplex in Memphis.
Lisa bought a duplex in Memphis for $250,000. Closing costs added $3,200 to basis. The county assessor's ratio showed 22% land, 78% improvements. Land value: $250,000 × 0.22 = $55,000. Depreciable basis: $250,000 + $3,200 − $55,000 = $198,200.
Annual straight-line depreciation: $198,200 ÷ 27.5 = $7,207. She closed on March 10, so year one used the mid-month convention: she got 9.5 months of depreciation (March 15 through December 31), or $7,207 × (9.5/12) ≈ $5,706. Every full year after that, she gets $7,207.
Her rental income was $2,400/month ($28,800/year). After operating expenses of $12,000, her net income before depreciation was $16,800. The $7,207 depreciation reduced her taxable rental income to $9,593. At a 24% marginal rate, that saved her about $1,730 in federal tax. When she sells in 10 years, she'll owe depreciation recapture on the total she's taken — but the deferral and time value are still valuable.
Pros & Cons
- Simple — no complex calculations, no study required
- Predictable annual deduction; easy to model in a spreadsheet
- Reduces taxable income every year without any cash outlay
- No additional cost (unlike cost segregation, which requires a study)
- Slow — 27.5 years means you're spreading deductions over a long period
- Cost segregation can accelerate by reclassifying 20–40% of basis into 5–7 year MACRS assets
- Depreciation recapture at sale — you'll pay 25% on what you've taken
Watch Out
- Land allocation: Don't overstate land to reduce depreciation. Use assessor data or an appraisal. Aggressive allocations can trigger an audit.
- Mixed use: If you use the property personally part of the year (e.g., you live in one unit), you can only depreciate the rental portion. The IRS has specific rules for mixed-use situations.
- Disposition: When you sell, depreciation recapture applies to the lesser of (1) gain on sale or (2) total depreciation taken. Plan for the tax in your sale proceeds.
Ask an Investor
The Takeaway
Straight-line depreciation is the default — and it's valuable. On a $250,000 rental, you might save $1,500–$2,500 per year in federal tax. For larger portfolios or higher-basis properties, cost segregation can front-load more deductions, but straight-line is the foundation. Know your basis, land value, and placed-in-service date, and let your CPA or tax software handle the mid-month convention.