Real Estate
intermediate · $100K - $250K
The IRS allows you to depreciate residential rental property over 27.5 years (3.636%/year).
A $500K building = $18,181 annual deduction even if the property gains value.
Creates "paper losses" to offset rental income.
Annual Limit
3.636% of building value per year
Key takeaways
- The IRS lets you depreciate residential rental buildings over 27.5 years (about 3.636% per year), even if the property gains value.
- Only the building depreciates, not the land, so you separate the two values first.
- Depreciation can create paper losses that offset rental income; up to $25,000 may offset other income if AGI is under $100K (phasing out to $150K).
- At sale, you owe depreciation recapture (up to 25%), unless deferred via a 1031 exchange or stepped up at death.
Requirements
- Own rental property placed in service
- Separate land value from building value
- Track depreciation for cost basis calculations
How to Implement
- 1Determine building value (exclude land)
- 2Divide by 27.5 years for annual depreciation
- 3Deduct depreciation on Schedule E
- 4Track cumulative depreciation for future sale
The bottom line
Rental depreciation produces annual paper losses that shelter rental income, with recapture due at sale. The passive-loss limits and your AGI determine how much you can use each year.
Frequently Asked Questions
Related real estate strategies
Sources
- Internal Revenue Service, Rev. Proc. 2025-32
2026 inflation-adjusted amounts (tax brackets, standard deduction, estate & gift, FSA, credits)
- Internal Revenue Service, Notice 2025-67
2026 retirement plan limits (401(k), IRA, SIMPLE, catch-up)
- Internal Revenue Service, Rev. Proc. 2025-19
2026 HSA and HDHP inflation-adjusted limits
Educational information only. Not financial, tax, or legal advice or a recommendation. Figures are drawn from the primary sources cited above; verify current amounts with the source before acting.