Depreciation lets you deduct the cost of a rental property’s building over time, even though you paid for it all upfront. It’s a non-cash deduction, meaning you take the expense on your tax return without actually spending money that year. This often creates paper losses that reduce your taxable income, which is one of the main tax advantages of owning rental real estate.

You can only depreciate the building, not the land. When you buy a property, you need to allocate the purchase price between the two. This is typically done using the county tax assessor’s ratio, an appraisal, or another reasonable method. Only the building portion enters your depreciation calculation.

The IRS uses the Modified Accelerated Cost Recovery System, commonly called MACRS, for rental property depreciation. For residential rental property, you depreciate the building over 27.5 years. For commercial property like retail, office, or industrial, the recovery period is 39 years. Each year you deduct a portion of the building’s cost, roughly 3.6% per year for residential and about 2.5% per year for commercial. The deduction flows through to your tax return and reduces your rental income from each property.

Cost segregation and bonus depreciation can accelerate part of the deduction into earlier years. A cost segregation study breaks down the property into its components and identifies items with shorter recovery periods. Carpeting, appliances, certain fixtures, and site improvements can often be depreciated over 5, 7, or 15 years instead of the full 27.5 or 39 years. Bonus depreciation allows you to deduct a large percentage of qualifying property in the year it’s placed in service, front-loading the tax benefit. The bonus depreciation percentage has been phasing down in recent years, so the timing of when you acquire property affects how much you can accelerate. Working with a fractional CFO for real estate who understands these strategies can help you plan acquisitions with the tax benefit in mind.

Keeping accurate depreciation schedules is part of proper real estate bookkeeping. The schedules track each asset, its basis, recovery period, and accumulated depreciation year by year. When you eventually sell a property, you’ll face depreciation recapture on what you’ve deducted, so having clean records from the start matters. The deduction is straightforward in concept but requires careful tracking and coordination with your tax returns to get right.