Home Depreciation Calculator

Calculate IRS depreciation deductions for rental property under Section 168. See annual deductions, tax savings at your bracket, cost segregation benefits, recapture tax at sale, and bonus depreciation options.

$
% of price
%
Annual Depreciation Deduction
$10,182
Saves $2,444/year in taxes · $204/month
Depreciable Basis
$280,000
Land Value (excl.)
$70,000
Depreciation Life
27.5 years
Monthly Deduction
$848
Annual Tax Savings
$2,444
25-Year Total Savings
$61,091

Cost segregation studies reclassify portions of your building into shorter depreciation lives (5, 7, or 15 years) to accelerate deductions in early years.

% of basis
% of basis
% of basis
Standard Straight-Line
$10,182
Year 1 deduction
Tax savings: $2,444
Same every year for 27.5 yrs
With Cost Segregation
$19,394
Year 1 deduction
Tax savings: $4,655
Extra year-1 benefit: $9,212
5-Year Basis
$42,000
15% of $280,000
7-Year Basis
$14,000
5% of $280,000
15-Year Basis
$28,000
10% of $280,000
27.5-Year Basis
$196,000
Remaining building structure
Additional Yr-1 Deduction
$9,212
vs standard straight-line
Additional Yr-1 Tax Savings
$2,211
At 24% tax rate
$
years
Accumulated Depreciation
$101,818
10 yrs × $10,182/yr
Adjusted Basis at Sale
$248,182
Purchase price minus depreciation taken
Total Capital Gain
$251,818
Sale price minus adjusted basis
Recapture Tax (25%)
$25,455
Section 1250 unrecaptured gain
Long-Term Capital Gains Tax
$22,500
15% LTCG rate applied
Total Tax on Sale
$47,955
Recapture + capital gains
Net After-Tax Proceeds
$203,864
After paying all sale taxes
Total Tax Savings (held period)
$24,436
24% rate on all deductions taken
Recapture note: When you sell, the IRS "recaptures" depreciation at a flat 25% rate (Section 1250), regardless of your regular tax bracket. This is separate from and in addition to any capital gains tax. The net effect is still positive — you deducted at your marginal rate (24%) but recapture is capped at 25%.

How Rental Property Depreciation Works

The IRS allows rental property owners to deduct the cost of the building (not land) over its useful life as a business expense. This is called cost recovery or depreciation under Section 168 of the Internal Revenue Code. It's one of the most powerful tax advantages of owning investment real estate.

Why Depreciation Matters

Depreciation creates a non-cash deduction — you get a tax write-off without actually spending any money in that year. On a $300,000 residential property with 20% land value, the $240,000 building basis generates $8,727 in annual deductions. At a 24% tax bracket, that's $2,095 in tax savings per year — or $174/month off your tax bill.

Straight-Line Method (Required for Real Property)

Residential rental property must use the straight-line method over 27.5 years. Commercial property uses 39 years. The same deduction is taken each year until the basis is fully recovered or the property is sold.

The Depreciation Formula

Depreciable Basis = Purchase Price − Land Value + Capital Improvements

Annual Depreciation = Depreciable Basis ÷ Depreciation Life
(27.5 years residential, 39 years commercial)

Annual Tax Savings = Annual Depreciation × Marginal Tax Rate

Monthly Tax Savings = Annual Tax Savings ÷ 12

Note: The first and last year of depreciation are pro-rated based on the month you placed the property in service. This calculator uses full-year amounts for simplicity.

Example: Rental Property in Austin, TX

Purchase Price: $420,000 | Land: 25% | Marginal Rate: 24%

Purchase Price$420,000
Land Value (25%)$105,000 (not depreciable)
Depreciable Basis$315,000
Depreciation Life27.5 years (residential)
Annual Deduction$11,455
Annual Tax Savings (24%)$2,749
Monthly Tax Savings$229
10-Year Cumulative Savings$27,490

This depreciation deduction reduces taxable rental income by $11,455/year, even if the property's market value is increasing. This is why real estate investors often show "paper losses" despite positive cash flow.

Frequently Asked Questions

Divide the depreciable basis (purchase price minus land value) by 27.5 for residential or 39 for commercial property. A $280,000 depreciable basis on a residential rental generates $280,000 ÷ 27.5 = $10,182 per year in deductions. Multiply by your marginal tax rate to find annual tax savings.
No. The IRS does not allow land depreciation because land does not wear out. Only the building and improvements are depreciable. Your county property tax assessment usually shows the land-to-building split. If you're unsure, a qualified appraiser can provide an allocation that the IRS will respect.
When you sell, the IRS recaptures all depreciation taken at a flat 25% tax rate (not your regular rate). If you held for 10 years and took $100,000 in deductions, you owe $25,000 in recapture tax. Since you deducted at your regular rate (say 24%), but recapture is 25%, the net tax cost is modest — especially considering the time value of money on deductions taken years ago.
Cost segregation is typically worth it for properties purchased for $500,000 or more. The study costs $5,000-$15,000 but can accelerate $50,000-$150,000 in deductions into year 1. For smaller properties, the fees often exceed the benefit. Ask your CPA if the numbers work for your specific property and tax situation.
Depreciation stops when the property is no longer used for rental purposes. When you eventually sell, you must still recapture all depreciation taken during the rental period at the 25% rate, even if the property was your primary residence for years before sale. The Section 121 exclusion ($250,000/$500,000 for primary residences) does not shield depreciation recapture.

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