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Glossary

Depreciation (Real Estate)

Also called: Straight-Line Depreciation, Real Estate Depreciation

The IRS-allowed annual deduction for the wear-and-tear of a rental property's building portion, spread over 27.5 years for residential and 39 years for commercial.

Full definition

Depreciation is the largest non-cash deduction most landlords get. The IRS lets you deduct the building portion of a rental property (not the land) over 27.5 years for residential rentals or 39 years for commercial. On a $300,000 residential property with a $60,000 land value, that's a $240,000 basis divided by 27.5 = $8,727/year deducted from taxable rental income. Depreciation is recaptured (taxed at up to 25%) when the property is sold, which is why serious investors use 1031 exchanges to defer.

Used for

  • rental property tax planning
  • real estate investor deductions
  • cost segregation studies

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