Why It Matters
Here's how the math works: divide the building's cost basis (purchase price minus land value) by 27.5 for residential or 39 for commercial — that's your annual deduction. Land is excluded because it doesn't wear out, so only the improvement value depreciates. The counterintuitive part: the IRS reduces your adjusted basis by the amount "allowed or allowable" — whether or not you claimed it. Skip the deduction and you still owe recapture tax at sale, with nothing to show for it. The accumulated depreciation is taxed as §1250 recapture at up to 25% when you sell — plan for it at underwriting, not at closing. Cost segregation can pull shorter-lived components onto accelerated schedules, but the structural shell stays on straight-line for the full recovery period.
At a Glance
- Residential rental buildings: 27.5-year recovery period — the same dollar amount deducted each year
- Commercial and nonresidential property: 39-year recovery period under MACRS
- Land is excluded: only the improvement (building) value is depreciable — land cannot be depreciated because it doesn't wear out
- Annual deduction formula: (Purchase Price − Land Value) ÷ 27.5 (or 39)
- Recapture on sale: accumulated straight-line depreciation on real property is §1250 recapture, taxed at up to 25% when the property is sold
Annual Depreciation = (Purchase Price − Land Value) ÷ Recovery Period
How It Works
The mechanics step by step. Allocate the purchase price between land and building using the county tax assessment ratio — apply the improvement percentage to your purchase price to get the depreciable basis. Divide by 27.5 (residential) or 39 (commercial) for the annual deduction. First and last year are partial: the mid-month convention treats acquisition as occurring on the 15th, so an August close gets 4.5 months in year one. The deduction flows to Schedule E and reduces taxable rental income dollar for dollar.
Why land allocation matters more than most investors realize. Land doesn't deteriorate, so the IRS doesn't allow depreciation on it — only the structure. Getting the split right at acquisition compounds over 27.5 years. On a $383,000 duplex, an 80/20 split gives a $306,400 depreciable basis; a 70/30 split gives $268,100 — a $38,300 gap that's worth roughly $26,900 in deductions over the full recovery period. The county assessment ratio is the accepted starting point; an appraisal can support a different position.
Interaction with cost segregation and accelerated depreciation. Straight-line depreciation covers the structural shell — walls, roof, foundation, and HVAC as a building system. A cost segregation study identifies personal property (carpet, appliances, light fixtures) and land improvements (parking lot, landscaping, fencing) that qualify for shorter 5-year, 7-year, or 15-year MACRS schedules, where bonus depreciation can front-load the deduction. Segregated components accelerate; the structural shell continues on straight-line. The study doesn't change the 27.5/39-year rule — it supplements it by pulling qualifying assets into faster pools.
Real-World Example
Diane purchases a duplex in Raleigh for $383,000. The county assessment values the land at $76,600 and improvements at $306,400 — 80% building. Her depreciable basis is $306,400 ÷ 27.5 = $11,142 per year. She closes in August, so the mid-month convention gives her 4.5 months in year one: $4,178. Years two through ten: $11,142 each.
By year ten she's claimed $103,696 in cumulative depreciation. When she sells for $487,000, the IRS taxes the $103,696 of accumulated straight-line depreciation as §1250 recapture at up to 25% — roughly $25,924 in additional tax, due regardless of whether the sale shows a capital gain. Diane modeled this at underwriting, so it wasn't a surprise. The recapture is a known, plannable cost, not a penalty for doing something wrong.
Pros & Cons
- Reduces taxable rental income each year — a $383,000 building generates over $11,000 in annual "phantom" deductions without any cash outlay
- Mandatory lower bound — even investors who don't claim depreciation see their adjusted basis reduced, so you might as well claim it and receive the benefit
- Predictable and consistent — the same dollar amount every year makes long-term modeling and exit projections straightforward
- Pairs with cost segregation — straight-line on the structural shell, accelerated methods on components
- Spread over 27.5 or 39 years — slow compared to bonus depreciation on personal property
- §1250 recapture at up to 25% applies when you sell — the annual deduction is partly taxed back on exit
- Land allocation errors compound across decades — a bad split in year one affects every year of the recovery period
- Does not track actual physical wear — a new build and a 50-year-old building use the same 27.5-year schedule
Watch Out
Depreciation reduces your basis whether or not you claim it. If you skip depreciation for several years, the IRS still reduces your adjusted basis by the amount "allowed or allowable." When you sell, recapture is calculated on that reduced basis regardless of what you filed — meaning you'd owe recapture tax without having received the deduction. The remedy is Form 3115, which lets you catch up all missed depreciation in one year. Don't restart mid-stream without filing the correction.
Land allocation is not arbitrary. The county assessment ratio is the IRS's expected starting point for the land/building split. Deviating significantly without support — say, allocating 92% to building when the county shows 75% — invites scrutiny. An appraisal or cost segregation study can justify a different split. Document the methodology at acquisition; reconstructing it years later under audit is much harder.
§1250 recapture is separate from capital gains. Many investors model a property sale as one capital gains calculation and miss the recapture layer entirely. The actual tax on sale has two components: (1) §1250 recapture on accumulated straight-line depreciation, taxed at up to 25%; and (2) capital gains on appreciation above the original cost basis. A 10-year hold with $103,000 of depreciation adds roughly $25,750 in recapture tax — on top of any gain. Model both when you underwrite the exit.
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The Takeaway
Straight-line depreciation is the baseline every rental property investor works from — residential over 27.5 years, commercial over 39, same dollar amount every year. It's not the most aggressive tool in the kit (that's cost segregation paired with bonus depreciation), but it's reliable and mandatory in its effect on basis. The 25% recapture tax at sale is the cost of that benefit — but the time value of annual deductions almost always wins out over a long hold, especially when a 1031 exchange rolls the recapture into the next deal.