When you invest in a rental property, depreciation is one of the biggest deductions you’ll claim. By spreading the cost of your building over its useful life, you shrink your taxable rental income and boost cash flow. In this guide, you’ll learn how depreciation works, how to calculate it correctly, and strategies to maximize your tax savings.

Understand property depreciation

Depreciation basics and benefits

Depreciation lets you recover the cost of your building over time, reflecting wear and tear, obsolescence, or normal use. For rental property owners, it’s a non-cash deduction that reduces taxable income without affecting your actual cash flow. Over a 27.5-year period for residential rentals, you can deduct roughly 3.636% of your building’s basis each year (Rentastic).

Key benefits:

• Lowers taxable rental income  
• Increases after-tax cash flow  
• Offsets maintenance and repairs  

By understanding depreciation, you’ll see why it’s a cornerstone of rental property tax planning and how you can redirect savings back into your portfolio.

IRS depreciation systems

The IRS offers two main systems for depreciating real estate:

Most landlords stick with GDS because it fronts more deduction power earlier. ADS may be mandatory in specific cases, and it can also be an election strategy if you want smaller, steadier deductions.

Calculate your cost basis

Include acquisition costs

Before you can depreciate your rental, you need its cost basis. Start with:

1. Purchase price of the property  
2. Closing costs (legal fees, title insurance)  
3. Improvement expenses (renovations, new roof)  

Add these up to get your depreciable basis for the building and improvements. You cannot depreciate the land itself, so it’s crucial to separate land value from building value.

Allocate building versus land

Correct allocation ensures you don’t leave deductions on the table. Here are three methods:

• Professional appraisal: A detailed valuation that splits land and building values.  
• Replacement cost evaluation: Insurance quotes indicating reconstruction cost of the building.  
• Competitive market analysis: Local comparables showing land versus improvements.  

A simplified approach uses property tax assessments:

Building basis = Total purchase price × (Assessed building value ÷ Assessed total value)

Land basis     = Total purchase price − Building basis

Keep documentation for whichever method you choose. In high-value markets like San Francisco, land can be over half the total value, so precision matters (Rentastic).

Choose depreciation method

General depreciation system

Under GDS, residential rental buildings use a 27.5-year schedule:

• Annual rate: 3.636%  
• Example: For a $200,000 building basis, you deduct $7,272 per year ($200,000 ÷ 27.5).

This method is straightforward and IRS-preferred for most long-term rentals.

Alternative depreciation system

ADS recovery periods are longer and produce smaller annual deductions. You might use ADS if:

• You elect it to reduce recapture risk down the road.  
• IRS requires it for foreign property or tax-exempt use.

Accelerated depreciation strategies

To front-load deductions, consider accelerated methods:

These strategies let you reclaim more costs in the early years, improving initial cash flow and ROI (Rentastic).

Start first-year depreciation

Placing property in service

Depreciation starts when your property is “placed in service,” meaning it’s ready and available for rent—even if you haven’t booked a tenant yet. Document the date you could have legally rented it, such as inspection approvals or listing dates.

Depreciation during vacancy

If your property sits empty but remains available, you keep deducting depreciation. You only stop when you withdraw it from rental use (convert to personal use or sell).

Maximize tax savings

Calculate the tax shield

Every dollar you depreciate saves taxes equal to your marginal rate:

Tax shield = Depreciation deduction × Tax rate

For example, a $10,000 deduction at a 30% bracket saves you $3,000 in taxes annually. That’s money you can reinvest or cover operating costs.

Use section 179 deduction

Section 179 lets you expense qualifying assets immediately instead of depreciating over years. You can apply it to things like:

• Appliances  
• HVAC systems  
• Office equipment for your rental business  

Limits apply, so check the annual caps before electing Section 179.

Qualify as real estate pro

If you or your spouse qualify as a real estate professional, you can use excess depreciation to offset other passive income. To qualify:

• Spend more than 750 hours per year in real estate trades.  
• More than half your working hours must be in real estate activities.

If you meet both tests, depreciation becomes even more powerful for tax planning.

Automate with software

Track depreciation schedules

Manually updating worksheets can lead to errors. Property management tools like Rentastic automate:

• Depreciation timeline setup  
• Monthly or annual depreciation entries  
• Adjustment for improvements or disposals  

This frees you from spreadsheets and reduces audit risk.

Generate profit and loss reports

Integrated software can produce P&L statements showing depreciation line items. These reports:

• Simplify tax preparation  
• Provide clear snapshots of rental performance  
• Highlight areas for cost optimization  

Automating these tasks saves time, so you can focus on growing your portfolio.

Avoid common mistakes

Avoid misallocating land value

Overestimating building basis inflates deductions and raises audit flags. Regularly review your allocation methods and update them if local assessments change.

Follow short-term rules

Short-term rentals like vacation homes use a 39-year depreciation schedule (Rentastic). Don’t apply the 27.5-year rule—mixing schedules can trigger IRS scrutiny.

Review depreciation annually

Tax law and your property’s condition evolve. Each year:

• Reconcile capital improvements.  
• Track repairs that reset component basis.  
• Confirm you’re on the optimal depreciation method.

Ongoing review ensures you capture every deduction while staying compliant.

With a clear understanding of depreciation, accurate cost allocation, and strategic use of accelerated methods, you can significantly boost your rental tax savings. Automating the process and avoiding common pitfalls keeps your books audit-ready and maximizes cash flow. Now it’s your turn: pick one strategy, update your depreciation schedule, and watch your after-tax returns climb.