Rental Property Depreciation: 27.5-Year Table and Formula

Rental property depreciation is a noncash tax deduction that spreads the cost of a residential rental building across its tax recovery period. Under the common U.S. federal General Depreciation System, or GDS, a residential rental building is generally depreciated using the straight-line method over 27.5 years. Land is excluded, and a mid-month convention changes the deduction in the first and final tax years.

The basic full-year formula is:

Annual depreciation = Depreciable building basis / 27.5

That formula is useful, but it is only accurate after you determine the right basis and account for the month the property was placed in service. The Rental Property Depreciation Calculator handles those steps for a planning estimate.

What is rental property depreciation?

Depreciation is the tax method used to recover the cost of qualifying income-producing property over time. It does not represent a monthly cash payment and does not measure a property's decline in market value.

The IRS explains that three factors determine the deduction: basis, recovery period, and depreciation method. IRS Publication 527 covers residential rental depreciation, including the 27.5-year GDS recovery period, straight-line method, and mid-month convention.

Depreciation also reduces adjusted basis. That can affect the gain or loss calculated when a property is sold. This guide and calculator estimate the annual building deduction only; they do not calculate sale taxes or depreciation recapture.

Rental property depreciation formula

For a property acquired for rental use, a simplified basis formula is:

Depreciable basis = (Purchase price - land value + building-allocable basis costs + pre-service capital improvements) x rental-use percentage

Then calculate a normal full-year deduction:

Full-year depreciation = Depreciable basis / 27.5

For a partial first year, residential rental real estate uses the mid-month convention:

First-year depreciation = Full-year depreciation x first-year recovery months / 12

The convention treats the building as placed in service at the midpoint of the month. A January service date produces 11.5 months of first-year depreciation, June produces 6.5 months, and December produces 0.5 month.

27.5-year residential rental property depreciation table

The IRS MACRS percentage table for residential rental property is Publication 946, Table A-6. It applies the straight-line method over 27.5 years with the mid-month convention and lists percentage rates for recovery years 1 through 29 based on the month the building was placed in service.

The first-year portion of that table is:

Multiply the depreciable building basis by the applicable first-year rate to estimate the deduction for a full calendar tax year. For example, a $255,000 basis placed in service in June produces an IRS-table estimate of:

$255,000 x 1.970% = $5,023.50

The exact half-month formula produces $5,022.73 before tax-return rounding, so a small difference can appear when a published percentage is rounded to three decimal places. Full recovery years in Table A-6 generally alternate between 3.636% and 3.637% for the same reason. The Rental Property Depreciation Calculator calculates the half-month schedule from the entered basis and prevents cumulative depreciation from exceeding that basis.

This table is a planning reference for a common GDS residential rental building. Different treatment can apply to personal property, improvements placed in service later, ADS property, short tax years, partial rental use, or property converted from personal use.

Step 1: Determine the property's basis

Basis often begins with cost, but it can include certain acquisition expenses and later adjustments. IRS Topic No. 703 explains that basis is generally cost and that improvements can increase adjusted basis while allowable depreciation reduces it.

Some settlement costs may be added to real-property basis, including qualifying legal, recording, transfer-tax, survey, and owner's title-insurance costs. Financing costs, prepaid interest, escrow deposits, and routine operating expenses do not all receive the same treatment. Because costs added to the overall real-estate basis may also require allocation between land and building, enter only the building-allocable amount in the calculator. Review the settlement statement carefully instead of entering every closing charge as depreciable basis.

If the property was first used personally and later converted to a rental, special conversion rules can apply. The depreciable basis may depend on the lower of adjusted basis or fair market value at conversion. The simple purchase-basis formula in this guide should not be used for that situation without tax advice.

Step 2: Allocate basis between building and land

Land is not depreciable. A combined purchase price must therefore be allocated between the land and the building before calculating depreciation.

IRS Publication 551 says a lump-sum real estate purchase must be allocated among land and buildings. When their separate fair market values are uncertain, assessed values for real estate tax purposes can be one source for the allocation. An appraisal or another supportable valuation may be more appropriate for a particular property.

For example, assume a rental is purchased for $300,000 and a supportable allocation assigns $60,000 to land:

• Total purchase price: $300,000
• Land allocation: -$60,000
• Building portion before other basis adjustments: $240,000

Using a default percentage without documentation can create a weak estimate. Keep the source used for the allocation with the property's tax records.

Step 3: Add qualifying capital improvements

A capital improvement generally adds value, adapts the property to a new use, or restores it, while a repair generally keeps the property in ordinary operating condition. The distinction affects whether a cost is deducted or capitalized.

For this calculator, the improvement input is intended for qualifying work completed before the building was ready and available for rent. An addition or improvement placed in service later may be treated as separate depreciable property with its own service date and recovery schedule.

Do not put routine repairs, mortgage principal, reserves, or the value of your own labor into the improvement field. Those items do not automatically increase depreciable basis.

Step 4: Apply the rental-use percentage

Only the part used to produce rental income can be depreciated. A detached rental used entirely by tenants may have 100% rental use. Renting one unit of a duplex while living in the other, renting part of a home, or mixing personal and rental use requires an allocation.

The allocation should reflect the actual rental portion under the applicable rules. Square footage or the number of rooms may be reasonable in some shared-property situations, but personal-use and vacation-home rules can be more complicated.

Step 5: Identify when the property was placed in service

Depreciation starts when a property is placed in service and ready for its income-producing use. That is not always the closing date, renovation start date, first lease-signing date, or the day the first tenant moves in.

If a property closes in March but requires renovation and is first ready and advertised for rent in June, June may be the relevant service month. Facts and documentation matter.

Residential rental buildings use the mid-month convention. The IRS treats a property placed in service at any point during a month as placed in service at that month's midpoint. That is why a simple annual basis divided by 27.5 overstates the first-year deduction unless the timing adjustment is included.

Worked rental depreciation example

Assume the following:

• Purchase price: $300,000
• Eligible costs added to basis: $5,000
• Land value: $60,000
• Pre-service capital improvements: $10,000
• Rental use: 100%
• Placed in service: June
• Marginal tax rate used for planning: 24%

First calculate depreciable basis:

($300,000 + $5,000 - $60,000 + $10,000) x 100% = $255,000

The normal full-year depreciation is:

$255,000 / 27.5 = $9,272.73

Because the property was placed in service in June, the mid-month convention provides 6.5 months in year one:

$9,272.73 x 6.5 / 12 = $5,022.73

At a hypothetical 24% marginal tax rate, multiplying the deduction by the rate produces a planning estimate of $1,205.46 in first-year federal tax savings. That is not guaranteed tax savings. Passive-activity rules, at-risk limits, tax brackets, ownership structure, other income, and state law can change how or when a deduction affects a return.

Depreciation deduction versus tax savings

A deduction is not a dollar-for-dollar tax credit. A $5,000 depreciation deduction does not automatically reduce taxes by $5,000.

A rough planning estimate multiplies the deduction by an assumed marginal tax rate:

Estimated tax savings = Depreciation deduction x marginal tax rate

Even that estimate may not be currently usable. Rental real estate losses can be limited or suspended under passive-activity and at-risk rules. A qualified tax professional can evaluate how the deduction interacts with the owner's complete return.

Depreciation versus rental cash flow

Depreciation and cash flow answer different questions. Depreciation is a noncash tax deduction. Cash flow tracks the actual money left after rent, operating expenses, and debt service.

A property can have positive cash flow and a tax loss, or negative cash flow and taxable rental income, depending on its financing, expenses, depreciation, and the owner's tax situation. Use the Rental Property Cash Flow Calculator for operating performance, then keep the depreciation estimate separate.

The rental property operating expenses checklist can also help prevent depreciation, reserves, debt service, and cash expenses from being mixed together in an investment analysis.

What this calculator does not include

The calculator is deliberately limited to a common residential building estimate. It does not calculate:

• cost segregation or component-level asset classification
• bonus depreciation or Section 179 treatment
• furniture, appliances, carpet, landscaping, or other shorter-life property
• the alternative depreciation system
• personal-to-rental conversion basis
• casualty losses or basis reductions
• passive-loss or at-risk limitations
• depreciation recapture or taxes on sale
• state depreciation differences

Those issues can materially change a tax return. IRS Form 4562 instructions explain federal reporting for depreciation and amortization, while Publication 527 provides the residential rental context.

Common rental depreciation mistakes

Common mistakes include:

• depreciating the full purchase price without removing land
• treating the mortgage balance as tax basis
• beginning depreciation on the closing date when the property was not ready to rent
• entering every closing charge as a basis cost
• combining later improvements with the original building schedule
• using 100% rental use for a partially personal property
• confusing the deduction with cash flow or guaranteed tax savings
• forgetting that allowed or allowable depreciation can affect adjusted basis

Good records support the purchase allocation, improvement costs, service date, rental-use percentage, and depreciation already claimed.

Final thoughts

Rental property depreciation starts with a defensible basis, not a shortcut percentage. Separate land, identify eligible basis costs, add qualifying improvements, apply the rental-use portion, and use the mid-month convention for the first year.

Run those inputs through the Rental Property Depreciation Calculator, then confirm the result against current IRS guidance and a qualified tax professional before filing a return.