What this line means
The annual depreciation deduction for the building (not land), capital improvements, appliances, and furnishings in your rental property — plus depletion for natural resource royalties. Residential rental property is depreciated over 27.5 years using straight-line depreciation. The building’s depreciable basis is the purchase price minus land value, plus capital improvements. This is usually the single largest non-cash deduction on Schedule E.
Does this apply to you?
- You own a rental building or dwelling and have a depreciable cost basis
- You made capital improvements to a rental property (new roof, kitchen remodel, HVAC system)
- You purchased appliances, furniture, or equipment for a rental property
- You receive royalties from mineral, oil, or gas rights and are entitled to depletion
Easy to overlook
You must claim depreciation whether or not you want to Depreciation on rental property is mandatory, not optional. Even if you skip claiming it, the IRS reduces your cost basis as if you had. When you sell the property, depreciation recapture tax (25% rate) applies to the amount you were allowed to deduct — whether or not you actually deducted it. Failing to claim depreciation loses the deduction now and triggers the recapture tax later. 1 IRS Publication 527 — Residential Rental Property
Capital improvements start their own depreciation schedule A new roof, replaced HVAC system, or kitchen renovation is a separate depreciable asset with its own 27.5-year schedule starting in the year placed in service. Landlords who add a $15,000 roof in year 10 sometimes forget to add it as a new depreciable asset, losing roughly $545 per year in deductions for the remaining ownership period. Track each improvement separately on Form 4562. 2 IRS Publication 946 — How to Depreciate Property
Watch out for this
Depreciating the land along with the building. Land is not depreciable. When you purchase a rental property, you must allocate the purchase price between the building and the land. A common method is using the property tax assessment ratio (if the county assesses the building at 80% and land at 20%, apply those percentages to your purchase price). Depreciating the full purchase price including land overstates the deduction and creates problems at sale.
Footnotes
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IRS Publication 527, Residential Rental Property, Depreciation. https://www.irs.gov/pub/irs-pdf/p527.pdf ↩
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IRS Publication 946, How to Depreciate Property, MACRS Depreciation. https://www.irs.gov/pub/irs-pdf/p946.pdf ↩