Depreciation Made Simple for Rental Property Owners

Understand depreciation basics

Whether you own a single-family rental property or manage multiple units, mastering depreciation is a powerful way to reduce your taxable income and improve your cash flow. In this guide you’ll learn how to apply IRS rules to your rental portfolio, pick the right depreciation system, and use strategies like cost segregation and Section 179 deductions to boost your returns.

What is depreciation?

Depreciation lets you deduct the cost of a tangible asset over its useful life. For a rental property, the IRS treats the building (not the land) as an asset you gradually “write off” each year. By spreading that cost across decades, you lower your taxable rental income without affecting your cash flow.

Why depreciation matters

• Lowers your taxable income, so you pay less in income taxes.
• Boosts cash flow by retaining more rental revenue.
• Creates a tax shield that can be reinvested in additional properties or improvements.
• Helps you track the wear and tear on your buildings and components.

Key terms and definitions

• Basis: The total cost of the property, including purchase price, closing costs, and qualifying improvements.
• Recovery period: The IRS-defined time (in years) over which you depreciate an asset.
• MACRS: Modified Accelerated Cost Recovery System, the current depreciation method for real estate.
• GDS and ADS: Two systems under MACRS with different timelines and rules.

Compare depreciation systems

Before you begin, you must choose between the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Each has its own timeline and eligibility rules.

General Depreciation System (GDS)

• Standard for most residential rentals.
• Recovery period: 27.5 years.
• Straight-line depreciation (equal deduction each year).
• Allows accelerated methods only for nonresidential assets.

Alternative Depreciation System (ADS)

• Longer timeline: 39 years for residential property used predominantly as a business (including short-term rentals).
• Required for properties used predominantly outside the United States or certain tax-exempt use.
• Straight-line depreciation only.

Choosing the right system

Most landlords stick with GDS since it offers a quicker write-off. However you may need ADS if your property’s classification or usage triggers IRS requirements. Consult a tax advisor when in doubt.

Calculate straight-line depreciation

Straight-line is the simplest method. You divide your depreciable basis by the recovery period to get your annual deduction.

Formula and example

1. Determine your basis:  

• Purchase price: \$250,000  
• Closing costs and fees: \$5,000  
• Improvements (roof, kitchen): \$20,000
  Total basis = \$275,000  

1. Subtract land value (non-depreciable):  

• Land value = \$50,000
  Depreciable basis = \$225,000  

1. Divide by 27.5 years (GDS):
   \$225,000 ÷ 27.5 = \$8,181.82 annual deduction  

Recovery periods for rental property

Recovery periods under MACRS depend on property type:

• Residential rental property: 27.5 years.  
• Nonresidential real property (office, retail): 39 years.  
• Qualified improvement property: 15 years.

For a short-term rental you may default to ADS at 39 years if you exceed certain business-use thresholds, but cost segregation can accelerate portions of your basis.

Explore accelerated depreciation

While straight-line spreads costs evenly, accelerated methods let you front-load deductions in early years. You don’t change total write-off—you just shift it sooner.

Double declining balance

• Applies a constant percentage (twice the straight-line rate) to the remaining basis each year.  
• Larger deduction in year 1, gradually declining.  
• Not commonly used for real estate under MACRS except for qualified business assets.

Sum-of-years-digits method

• Adds the digits of the recovery period (e.g., for 5 years: 5+4+3+2+1=15)  
• Year 1 deduction = remaining basis × (5/15), year 2 = (4/15), etc.  
• More complex and less common for real estate.

Pros and cons

Conduct cost segregation studies

Cost segregation breaks down your property into components with shorter lives (5, 7, or 15 years). By accelerating depreciation, you boost early deductions and cash flow.

What is cost segregation?

A detailed engineering-based analysis that separates:

• Land improvements (driveways, fences): 15 years.  
• Personal property (appliances, carpeting): 5 or 7 years.  
• Building structure: 27.5 or 39 years.

Benefits for short-term rentals

• Short-term rentals face more wear and tear, making accelerated write-offs especially valuable.  
• You may qualify for 80 percent bonus depreciation on eligible components acquired and placed in service through 2025.

Working with professionals

• Engage a qualified cost segregation firm or CPA.  
• Ensure the study meets IRS guidelines to withstand audit scrutiny.  
• Balance study fees against projected tax savings.

Claim Section 179 deductions

Section 179 lets you deduct the full cost of certain property in the year it’s placed in service, instead of capitalizing and depreciating over time.

Eligible assets and limits

• Applies to real property improvements: HVAC, security systems, roofing, fire protection.  
• 2025 deduction limit: \$1,160,000; phase-out starts at \$2,890,000 of total equipment purchases.  
• Only the business portion of mixed-use assets qualifies.

How to calculate deductions

1. Total cost of qualifying improvements: \$40,000  
2. Under the section 179 limit, you elect to expense \$40,000 in year one.  
3. Remaining basis follows regular depreciation schedules.

Review IRS Publication 946 for details and election steps.

Track depreciation with software

Accurate record-keeping is crucial. Property management and accounting tools can automate depreciation schedules and reporting.

Benefits of automation

• Reduces manual errors in calculations.  
• Generates Profit & Loss (P&L) statements with depreciation line items.  
• Stores supporting documents (invoices, cost segregation reports).

Features to look for

• Automated import of income and expenses from bank accounts.  
• Tagging by property and asset category.  
• Depreciation schedule generator with GDS and ADS options.  
• Exportable reports for tax filing.

Example: Rentastic

Rentastic simplifies depreciation tracking by:

• Syncing bank feeds for accurate expense tagging.  
• Visualizing cash flow on dashboards.  
• Generating IRS-compliant depreciation schedules for each rental property.  

Integrating a tool like Rentastic helps you focus on growth instead of spreadsheets.

Maximize depreciation benefits

To get the most from depreciation, combine strategies and stay disciplined in your documentation.

Combining strategies

• Use straight-line for core building value.  
• Accelerate components with cost segregation.  
• Elect Section 179 for qualifying improvements in the acquisition year.  
• Claim bonus depreciation when available.

Avoiding common pitfalls

• Don’t depreciate land.  
• Keep separate records for each property.  
• Watch for “mid-month convention” rules—depreciation starts in the month you place the asset in service.  
• Avoid over-claiming: audits often focus on cost segregation studies and Section 179 elections.

Documenting expenses

• Save closing statements, contractor invoices, and cost segregation reports.  
• Track legal fees, title charges, and improvement costs—these add to your basis.  
• Maintain a depreciation worksheet for each asset class.

Review IRS rules and updates

Tax law changes can affect your depreciation strategy. Keep up-to-date to ensure compliance and take advantage of new opportunities.

IRS recovery periods

Since 1987, residential property remains at 27.5 years while nonresidential sits at 39 years under GDS. ADS periods are longer and mandatory in certain scenarios.

Special depreciation allowances

• Bonus depreciation: up to 80 percent on eligible property placed in service by end of 2025.  
• Watch for extensions or phase-downs in future tax bills.

Staying compliant

• File Form 4562 with your tax return to report depreciation and Section 179.  
• Review IRS Publication 527 for rental real estate rules.  
• Consult a tax professional when major legislative changes occur.

Take next steps

Putting these strategies into action will help you unlock significant tax savings and boost your rental business.

Actionable checklist

• [ ] Determine basis and land value for each property.  
• [ ] Choose GDS or ADS based on usage and eligibility.  
• [ ] Calculate straight-line depreciation for your building.  
• [ ] Consider cost segregation to accelerate component write-offs.  
• [ ] Elect Section 179 for qualifying improvements.  
• [ ] Implement depreciation tracking software like Rentastic.  
• [ ] File Form 4562 and update your tax returns.  
• [ ] Review depreciation schedules annually and adjust for new assets.

Resources and further reading

• IRS Publication 527, Residential Rental Property  
• IRS Publication 946, How To Depreciate Property  
• “Cost Segregation Audits: Best Practices,” Journal of Accountancy  
• Rentastic depreciation tracking tools and tutorials (rentastic.com)  

By following this guide, you’ll keep more of your rental income in your pocket, maintain compliance, and drive your real estate investments forward. Happy depreciating!