Calculate annual depreciation deduction for your rental property. See tax savings from depreciation. Free real estate depreciation calculator.
Depreciation is the most powerful tax benefit of real estate investing — and the most misunderstood. You can deduct a portion of your property's value every year against your rental income even while the property appreciates in value. On a $300,000 rental property this can mean $8,000-$10,000 in annual tax deductions reducing your taxable income.
IRS allows depreciation of residential rental property over 27.5 years using straight-line method. Only the structure depreciates — not the land value. Formula: (Purchase price minus land value) divided by 27.5 = annual depreciation. Example: $320,000 property, $50,000 land value: $270,000 / 27.5 = $9,818/year in depreciation deduction. At 22% tax bracket: saves $2,160/year in taxes.
Cost segregation study identifies components of a property that can be depreciated faster: 5-year property (appliances, carpeting), 7-year property (office equipment), 15-year property (landscaping, parking lots) versus standard 27.5-year structure. Bonus depreciation allows 60% immediate deduction in 2024-2025 (phasing down). Cost segregation on a $500,000 property can create $80,000-$150,000 in accelerated deductions in year one.
Step 1: Determine depreciable basis — purchase price plus acquisition costs minus land value. Step 2: Divide depreciable basis by 27.5 years. Example: $400,000 property, $60,000 estimated land value: ($400,000 - $60,000) / 27.5 = $12,364 annual depreciation. This amount reduces your taxable rental income each year you own the property.
Depreciation recapture applies when you sell. The IRS taxes recaptured depreciation at 25% (unrecaptured Section 1250 gain) — not the lower long-term capital gains rate. Example: $100,000 in total depreciation claimed over 10 years: $25,000 recapture tax at sale. A 1031 exchange can defer both capital gains and depreciation recapture by rolling into another property.
Passive activity loss rules apply. If you actively participate in rental management and your income is under $100,000: you can deduct up to $25,000 in passive losses against ordinary income. This allowance phases out between $100,000-$150,000 income. Above $150,000 income: losses carry forward to offset future rental income or gains at sale — not lost, just deferred.
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