Short answer: You deduct the building's cost, not the land, over 27.5 years using straight-line MACRS GDS (IRS Pub 527), about 3.636% per full year. The first year is prorated by the month the property is placed in service using the mid-month convention. On a $162,400 building basis that is about $5,905 a year of deductions, with no change to cash flow.
Definition
Rental property depreciation is a yearly tax deduction for the wear on a rental building (not the land). US residential rentals are depreciated straight line over 27.5 years, about 3.636% of the building basis per full year.
By the numbers: IRS Pub 527: residential rental buildings use MACRS GDS over 27.5 years with the mid-month convention; up to $25,000 of rental losses can offset other income for active participants, phased out between $100,000 and $150,000 of modified AGI.
What depreciation is
The IRS treats a rental building as something that wears out, so you deduct its cost a little each year instead of all at once. For homes and apartments placed in service as rentals, IRS Publication 527 says to use MACRS GDS: straight line over 27.5 years.
Yearly depreciation = building basis ÷ 27.5That works out to about 3.636% of the building's basis for each full year. On a $162,400 building basis, that is about $5,905 a year that reduces your taxable rental income, even though no cash left your account.
Good to know: Depreciation lowers taxes; it does not change cash flow. FirstDoor's cash flow, cap rate, cash-on-cash and DSCR are all pre-tax, so depreciation is a bonus on top of a deal that already works, not a reason to buy one that doesn't.
What you can (and can't) depreciate
Land is never depreciable, so the first step is splitting the price between land and building. Pub 527 says to use the ratio of their fair market values, and if you are not sure, you can use the split on the property tax assessment. The IRS example: a $200,000 purchase assessed at $136,000 house and $24,000 land gives 85% to the building, so a $170,000 basis.
| Goes into basis | Does not |
|---|---|
| Purchase price (building share) | Land |
| Title insurance, recording fees, transfer taxes, surveys, legal fees | Loan costs: points, origination, credit report, appraisal for the loan |
| Improvements after purchase (new roof, furnace, water heater, addition) | Fire insurance premiums and rent for occupancy before closing |
Improvements are depreciated as separate property, generally over the same 27.5 years as the building. Ordinary repairs that keep the place in working order are deducted in the year you pay them instead.
Red flag: Depreciating the whole purchase price. In high-cost areas land can be a large share of value, and depreciating it overstates your deduction.
The first year is partial (mid-month)
Residential rentals use the mid-month convention: whatever day the property is placed in service (ready and available to rent), the IRS treats it as the middle of that month. So the first-year percentage depends on the month. These match Pub 527's Table 2-2d (its own example: February, 3.182%):
| Placed in service | Year-1 rate | On $162,400 |
|---|---|---|
| January | 3.485% | $5,659 |
| February | 3.182% | $5,167 |
| April | 2.576% | $4,183 |
| July | 1.667% | $2,707 |
| October | 0.758% | $1,230 |
| December | 0.152% | $246 |
After that, each full year is 3.636% until the basis is used up in year 28 or 29.
Tip: Depreciation starts when the rental is ready and available to rent, not when you close or when the first tenant moves in. Keep the listing date and photos.
Why positive cash flow can be a tax loss
Cash flow subtracts the full mortgage payment. Taxable rental income subtracts only the interest part, but it also subtracts depreciation. On the worked example below, year one looks like this:
| Rent ($2,000 × 12) | $24,000 |
| Operating costs (tax, insurance, vacancy, maintenance, management) | −$7,920 |
| Mortgage interest, year 1 (not principal) | −$11,790 |
| Depreciation (full year) | −$5,905 |
| Taxable rental income | −$1,615 |
The same deal puts about $2,786 of cash in your pocket that year. Whether you can use a paper loss against your salary depends on the passive activity rules: if you actively participate (you own at least 10% and make real management decisions such as approving tenants, setting rental terms and approving expenses), Pub 527 allows up to $25,000 of rental losses against other income. That allowance shrinks by 50% of your modified AGI above $100,000 and is gone at $150,000 (half those amounts if married filing separately). Losses you can't use carry forward.
Good to know: This ignores the deductible part of closing costs, loan points (amortized), and state taxes. It is an illustration of how the pieces fit, not a tax estimate for your situation.
The catch: recapture when you sell
Depreciation lowers your basis, which raises your taxable gain when you sell. The part of a long-term gain that comes from depreciation (unrecaptured section 1250 gain) is taxed at a maximum 25% federal rate, per IRS Topic 409, rather than the usual long-term capital gains rates.
In the example, ten full years of depreciation is about $59,055. You got that deduction along the way, but it comes back into the math when you sell. Ways to defer it, such as a 1031 exchange, are worth a conversation with a CPA.
Red flag: Skipping depreciation to "avoid recapture." 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.
Next: run the pre-tax numbers first with the beginner's analysis guide and the cash-flow calculator. Then take your basis split and placed-in-service date to a tax pro.
Worked example
A $200,000 single-family rental at $2,000/mo, 20% down at 7.40% for 30 years (Freddie Mac average, October 15, 2026), $2,400/yr tax, $1,200/yr insurance, 5% vacancy, 5% maintenance, 8% management. Assumed for illustration: land is 20% of value (check your tax assessment) and $3,000 of the $6,000 closing costs go into basis.
| Building basis (80% of price + basis closing costs) | $162,400 |
| Depreciation per full year (÷ 27.5) | $5,905 |
| Year-1 mortgage interest | $11,790 |
| Taxable rental income, year 1 | −$1,615 |
Frequently asked questions
How does depreciation work on a rental property?
You deduct the building's cost, not the land, over 27.5 years using straight-line MACRS GDS (IRS Pub 527), about 3.636% per full year. The first year is prorated by the month the property is placed in service using the mid-month convention. On a $162,400 building basis that is about $5,905 a year of deductions, with no change to cash flow.
Can you depreciate land?
No. Land is not depreciable. Split the purchase price between land and building by fair market value; IRS Pub 527 says you can use the ratio on your property tax assessment if you are unsure.
What closing costs are added to the basis of a rental?
Per Pub 527, settlement costs such as title insurance, recording fees, transfer taxes, surveys and legal fees go into basis. Loan costs such as points, origination fees and credit report fees do not; points are generally amortized over the loan instead.
Can rental depreciation offset my W-2 income?
Sometimes. If you actively participate, up to $25,000 of rental losses can offset other income, phased out by 50% of modified AGI above $100,000 and gone at $150,000 (half for married filing separately). Unused losses carry forward. Real estate professionals follow different rules.
What is depreciation recapture?
When you sell, the part of your long-term gain that came from depreciation (unrecaptured section 1250 gain) is taxed at a maximum 25% federal rate, according to IRS Topic 409.
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Sources
Educational content, not financial advice. Loan programs and requirements change; confirm with a lender.