Short answer: Residential rental buildings are depreciated straight line over 27.5 years (IRS Pub 527). Take the price plus closing costs that go into basis, remove the land share, add improvements, and divide by 27.5. The first year is prorated by the month the rental is placed in service.
It uses the same formulas as FirstDoor's full deal score.
How rental property depreciation is calculated
IRS Publication 527 says a residential rental building is depreciated with MACRS GDS: straight line over 27.5 years, using the mid-month convention. Land is never depreciated, so you split your cost basis between land and building first.
Building basis = (price + closing costs that go into basis) × (1 − land share) + improvementsDepreciation per full year = building basis ÷ 27.5 (about 3.636%)Pub 527 says to split the basis by the fair market values of land and building, and if you are not sure of them, you can use the ratio on your property tax assessment. Closing costs that go into basis include title insurance, recording fees, transfer taxes, surveys and legal fees. Loan costs such as points and the lender's appraisal do not.
Worked example
The defaults are the example from our depreciation guide: a $200,000 rental with $3,000 of closing costs going into basis. The land share of 20% and the 22% tax rate are assumptions for illustration, so use your own assessment and rate.
| Building basis (80% of $203,000) | $162,400 |
| Depreciation per full year | $5,905 |
| Per month | $492 |
| Tax it can save per full year at 22% | $1,299 |
| Depreciation after 10 full years | $59,055 |
| Max federal tax on it when you sell (25%) | $14,764 |
First-year depreciation by month
Under the mid-month convention, a property placed in service any day of a month is treated as placed in service in the middle of it. The year-1 rate is (12 − month + 0.5) ÷ 12 ÷ 27.5, which matches Pub 527's Table 2-2d (its own example is February, 3.182%). Here is the year-1 deduction on the $162,400 example basis:
| Placed in service | Year-1 rate | Deduction |
|---|---|---|
| January | 3.485% | $5,659 |
| February | 3.182% | $5,167 |
| March | 2.879% | $4,675 |
| April | 2.576% | $4,183 |
| May | 2.273% | $3,691 |
| June | 1.970% | $3,199 |
| July | 1.667% | $2,707 |
| August | 1.364% | $2,215 |
| September | 1.061% | $1,722 |
| October | 0.758% | $1,230 |
| November | 0.455% | $738 |
| December | 0.152% | $246 |
After the first year, each full year is 3.636% until the basis is used up in year 28 or 29. Depreciation starts when the rental is ready and available to rent, not when you close.
What the tax savings line means
The savings figure is depreciation times your tax rate, and you only get it if you can use the deduction. Rental losses are passive. Pub 527 lets you deduct up to $25,000 of them against other income if you actively participate, and that allowance phases out between $100,000 and $150,000 of modified AGI. Losses you can't use carry forward.
When you sell, the depreciation you were allowed comes back as unrecaptured section 1250 gain, taxed at a maximum 25% federal rate (IRS Topic 409). That is why the calculator shows it next to the deduction. FirstDoor's cash flow, cap rate and DSCR are all pre-tax, so check the deal works first in the cash flow calculator.
Frequently asked questions
How do you calculate depreciation on a rental property?
Add the closing costs that go into basis to the price, remove the land share, add any improvements, and divide by 27.5. That is the deduction for each full year. The first year is prorated by month under the mid-month convention.
Why 27.5 years?
IRS Publication 527 assigns residential rental property a 27.5-year recovery period under MACRS GDS, depreciated straight line. That is about 3.636% of the building basis per full year.
How do I know the land value?
Pub 527 says to split the basis by the fair market values of land and building. If you are not sure of them, you can use the land and improvement values on your property tax assessment.
Can I skip depreciation to avoid recapture?
Usually no help. The IRS reduces your basis by the depreciation you were allowed to take, whether or not you claimed it, so skipping it usually just loses the deduction.
What does this calculator leave out?
Bonus or cost-segregation depreciation, separate recovery periods for items like appliances or land improvements, the partial year when you sell, state rules, and the passive loss limits on using the deduction. It is an estimate, so check with a tax pro.