Rental Depreciation: How the 27.5-Year Schedule Works

Section 168 sets three things for every depreciable asset: a method, a recovery period and a convention. For residential rental property the method is straight line, the recovery period is 27.5 years, and salvage value is treated as zero, so the whole depreciable basis is recovered. Nonresidential real property gets 39 years.

The building has to qualify as residential rental property. The Code defines that as a building or structure where 80 percent or more of the gross rental income for the year comes from dwelling units. A house or an apartment building usually passes. A hotel, or a building that is mostly commercial space, does not.

The convention matters in the first and last years. Under the mid-month convention, a building placed in service in any month is treated as placed in service at the midpoint of that month. April gets 8.5 months of depreciation in year one: not 9, not 8. The same applies in the month you sell or otherwise dispose of it.

Residential rental property can be put on the alternative depreciation system, which uses 30 years. For real estate, that election is made property by property. It slows the deduction, so make it on purpose.

Start with cost. Certain settlement fees and closing costs on the purchase, such as legal fees, are added to basis instead of being deducted. Then split the total between land and building. Pub. 527 says each share is the ratio of its fair market value to the value of the whole property when you bought it. If you are unsure of the values, assessed values for real estate tax purposes are an accepted fallback.

Land is not depreciable, since land generally does not wear out, become obsolete or get used up. Clearing, grading and landscaping costs are usually treated as part of the land too. If the county assessment puts 75% of the value in the building, 75% of your total basis is depreciable. An appraisal or a cost allocation done at closing may support a different split. Whatever split you use, document it in your file the year you buy.

Later additions are different. A new roof, an addition or a major remodel is a separate property item with its own start date and its own 27.5-year clock. The line between those costs and ordinary repairs is covered in repairs versus improvements.

The 3.636% is one year of 27.5, or 100% divided by 27.5. Pub. 527 and Pub. 946 publish the first-year numbers in Table 2-2d and Table A-6, so you do not have to work out the month fraction yourself. Find the row for the month placed in service and use the same row every later year. Applied to a $160,000 building placed in service in February, the Pub. 527 example uses 3.182% and gets $5,091.

The last year is the leftover. Counting 27.5 years from mid-April 2026 gives 330 months. After 8.5 months in 2026 and 12 months in each of the next 26 years, 9.5 months remain for 2053. That final slice is about 2.879% of the building basis. After it, depreciation stops because the cost has been recovered.

If you deducted too little or too much in a year, Pub. 527 says you may be able to correct it on Form 1040-X. When an amended return is not allowed, it points to a change in accounting method, which Pub. 946 explains. For an error in a year you already filed, give a preparer the original purchase documents, because the right route depends on how many years the error has run.

Going forward, Schedule E line 18 takes the depreciation, and Form 4562 is attached when you place property in service during the year, among other triggers. For how losses from a rental are limited once you have a deduction, see the passive loss rules. For the sale side, see selling a rental. Shorter recovery periods for parts of a building are covered in cost segregation.