Rental Property Depreciation Calculator

Depreciation is a deduction against rental income that costs no cash. On the example deal, a full-year $8,122 deduction at a 24% marginal rate could save $1,949 of tax — about half the $3,841 of pre-tax cash flow the property produces, if the deduction is usable at that rate.

Taxable income and cash flow differ: mortgage principal is not deductible, and a reserve budget is not itself a tax deduction. The first-year deduction is also smaller under the mid-month convention. Use actual deductible expenses and your own tax position when assessing the benefit.

Depreciation is a deferral, not a forgiveness. On sale, everything you deducted comes back as unrecaptured Section 1250 gain, taxed at up to 25% federal — above the 15% or 20% long-term capital gains rate that applies to the rest of the profit.

• Hold ten years on this property and you deduct roughly $78,853, potentially saving $18,925 of tax along the way at 24%.
• Sell, and up to $19,713 of that comes back as recapture at 25%.
• The benefit is the time value of the deferral plus the rate arbitrage if your marginal rate was above 25% while you held it.
• A 1031 exchange defers both the recapture and the capital gain into the replacement property, with 45 days to identify it and 180 days to close.

How do you calculate depreciation on a rental property?

Allocate the purchase price and capitalised closing costs between land and building, then add building improvements completed before the property enters service. Divide the building basis by 27.5 years for residential rental property. Here, $269,200 of acquisition cost less $53,840 of land plus $8,000 of upfront building improvements is $223,360 depreciable, giving about $8,122 for each full year.

What is the mid-month convention?

The IRS treats property as placed in service in the middle of the month it actually was, so the first year gets (12 − month + 0.5) ÷ 12 of a full year. A residential property placed in service in January gets 11.5/12 of a year — 3.485% of basis, exactly the first figure in IRS Publication 946 Table A-6. The example, placed in service in April, gets 2.576%.

Why can I not depreciate the land?

Depreciation recovers the cost of an asset over its useful life, and land does not wear out. The allocation between land and improvements usually comes from the county assessor's own split on the tax bill, though a cost segregation study or an appraisal can support a different one. Getting it wrong in either direction is a real audit exposure.

What is depreciation recapture and how much is it?

When you sell, the depreciation you deducted is recaptured as unrecaptured Section 1250 gain, taxed at a maximum federal rate of 25% — higher than the long-term capital gains rate on the rest of the profit. Ten full years at about $8,122.18 is about $81,222 of deductions, so up to $20,305 of federal recapture tax.

Can I skip depreciation to avoid recapture later?

No. The IRS recaptures depreciation allowed or allowable, meaning you owe the tax on what you could have deducted whether or not you actually did. Skipping the deduction gives up the annual benefit and keeps the eventual bill, which is the worst of both.

A separate illustration adds the potential depreciation shield to the pre-tax return shown by the rental property ROI calculator. For the cash side of the same deal, see the rental property calculator, and for the terms used here, the cost basis and depreciation recapture glossary entries. This is general information, not tax advice — the allocation between land and improvements in particular is worth a conversation with your accountant.