27.5 years straight-line
Real estate depreciation: the tax benefit most investors miss
For tax purposes, residential rental property is depreciated straight-line over 27.5 years; commercial property over 39 years. The land itself is never depreciated — only the building. Depreciation creates a non-cash expense that reduces taxable rental income, but is recaptured at sale at a flat 25% rate. Cost segregation studies can accelerate deductions on qualifying components.
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04 · ideas- IRS allows depreciation of rental structures over 27.5 years
- A $300,000 rental property (70% structure) generates $7,636/year in paper deductions
- Cost segregation can accelerate 25-40% of depreciation to years 1-5
- Depreciation recapture tax at 25% applies on sale — but can be deferred via 1031 exchange
When you own a rental property, the IRS allows you to deduct a portion of the building's value each year as "depreciation" — even while the property may be appreciating in real value. This is purely a tax accounting concept.
The rule: Residential rental buildings depreciate over 27.5 years using straight-line depreciation. Only the building (not land) can be depreciated.
Example: You buy a $400,000 rental house. Land value = $100,000, building = $300,000.
Annual depreciation deduction: $300,000 ÷ 27.5 = $10,909/year
If you're in the 24% tax bracket, this deduction saves you: $10,909 × 24% = $2,618 per year in taxes
Over 10 years: $26,180 in tax savings — real money, from a paper deduction.