Calculating property depreciation for taxes comes down to one formula: the building’s depreciable basis, spread across its IRS recovery period, adjusted for the month it went into service. If you own a rental home, an apartment building, or a commercial property, the steps below show where each input comes from and how to turn it into the number your return needs.
As co-founder of Seneca Cost Segregation and a real estate investor myself, I’ve worked with owners of everything from small single-family rentals to multi-million-dollar manufacturing plants. What we see consistently is that the arithmetic rarely causes trouble; the inputs do, from land values pulled from the wrong source to start dates that miss by a few months.
Below, I walk through the six steps for residential and commercial property, run two complete examples, and show what changes in the year you sell or when a study splits the building into components.
TL;DR: How to Calculate Property Depreciation
- ●Once the inputs are right, the deduction is a table lookup: depreciable basis multiplied by the IRS percentage for your property class and placed-in-service month gives the year’s figure.
- ●Land comes out first: split your cost basis by fair market value or your assessor’s ratio, since only the building can be depreciated.
- ●27.5 years for residential, 39 for commercial: a building counts as residential rental property when 80% or more of its rent comes from dwelling units.
- ●On a $344,800 rental placed in service in May, year one is $7,837: every full year after that is $12,537, and the same building with an assumed 22% of basis in shorter-life components deducts $81,969 in year one.
- ●The year you sell gets a partial deduction too: the month of sale counts as half a month, and the depreciation you took is taxed at up to 25% as unrecaptured section 1250 gain.
- ●Skipped depreciation still reduces your basis: the IRS counts what you were allowed to take, so a missed deduction is worth fixing with Form 3115 before you sell.
Know What Property You Can Depreciate
Depreciation recovers the cost of property that wears out, and the IRS sets four conditions before any deduction starts.
- ●You own the property, even if a mortgage is attached to it.
- ●You use it in a business or an income-producing activity, such as a rental.
- ●The property has a determinable useful life, meaning it wears out, decays, or becomes obsolete.
- ●The property is expected to last more than one year.
Land fails the useful-life test. IRS Publication 946 explains that land does not wear out, become obsolete, or get used up, so its cost stays on your books undepreciated until you sell.
Buildings placed in service after 1986 are depreciated under the Modified Accelerated Cost Recovery System (MACRS), which sets the recovery period, method, and convention for each class of property.
Calculate Property Depreciation in Six Steps
Every annual figure comes from multiplying depreciable basis by the IRS table percentage for your property class and placed-in-service month.
Step 1: Establish Your Cost Basis
Your starting point is the price you paid plus certain costs of buying the property. IRS Publication 527 lists the settlement fees and closing costs that become part of basis:
- ●Abstract fees and legal fees
- ●Recording fees and surveys
- ●Transfer taxes and title insurance
- ●Charges for installing utility services
- ●Amounts the seller owed that you agreed to pay, such as back taxes, repairs, or sales commissions
Costs tied to your loan stay out of basis, including points, origination and assumption fees, credit reports, and a lender-required appraisal. Fire insurance premiums and escrow deposits stay out as well, while an existing mortgage you assume is part of your cost.
Step 2: Separate the Land From the Building
Land carries no depreciation, so the next step is splitting your cost basis between land and building.
The IRS allocates cost by the ratio of each part’s fair market value at the time of purchase. When those values are unclear, Publication 527 allows the split to follow the assessed values on your real estate tax bill; in its example, a $200,000 purchase assessed 85% to the house leaves a $170,000 building basis.
What we find on residential purchases is that the land percentage moves the result more than owners expect, since every dollar assigned to land is a dollar that never depreciates. Our guide on how to determine land value compares an appraisal with the assessor’s ratio and explains when each one holds up.
Step 3: Confirm the Property Class and Recovery Period
The recovery period depends on how the IRS classifies the building.
Residential rental property is a building where 80% or more of gross rental income comes from dwelling units, and its recovery period is 27.5 years. Units in a hotel, motel, or similar establishment where more than half are rented on a transient basis do not count as dwelling units.
Nonresidential real property, such as an office building, store, or warehouse, is recovered over 39 years. Both classes use the straight line method under the General Depreciation System (GDS).
The Alternative Depreciation System (ADS) stretches those periods to 30 years for residential rental property placed in service after 2017 and 40 years for nonresidential property. ADS is required in limited cases, including buildings held by a real property trade or business that elected out of the business interest limitation.
Step 4: Pin Down the Placed-in-Service Date
Depreciation starts when the property is ready and available for its intended use, which can differ from both the closing date and the day a tenant moves in.
In the Publication 527 example, a house bought April 6, repaired, and ready for rent on July 5 is placed in service in July, even though the first tenant arrived September 1. Keep the listing date or the date repairs finished in your records, since that month drives the next step.
Step 5: Apply the Mid-Month Convention and IRS Table
Residential and nonresidential real property both use the mid-month convention, which treats a building as placed in service halfway through its month.
A building ready in January therefore gets 11.5 months of depreciation in year one, while one ready in December gets half a month. The IRS builds that adjustment into Tables A-6 and A-7a of Publication 946, so you multiply your depreciable basis by the percentage for your month.
After the first year, a residential building takes 3.636% of basis a year and a nonresidential building takes 2.564%. Later residential years alternate between 3.636% and 3.637% for rounding, and the final year picks up the leftover partial month.
Step 6: Report the Deduction on Your Return
The deduction reaches your return through two forms in the first year and usually one after that.
The Form 4562 instructions require the form for depreciation on property placed in service during the tax year. On the 2025 form, residential rental property goes on line 19i and nonresidential real property on line 19j, each with the month placed in service, the basis, the recovery period, MM for mid-month, and S/L for straight line.
Rental owners then carry the depreciation to Schedule E, line 18, for each property. In later years, the Publication 527 examples show depreciation entered directly on Schedule E with no Form 4562 when nothing new was placed in service and no other item calls for the form.
Work Through a Rental and a Commercial Example
Here are both property classes run through the six steps with simplified, hypothetical numbers.
A Residential Rental Placed in Service in May
You buy a single-family rental for $425,000 and pay $6,000 of closing costs that belong in basis, for a cost basis of $431,000. The assessor values the land at 20% of the property, so the building’s depreciable basis is $344,800, and the house is ready for rent in May.
May’s first-year rate for 27.5-year property is 2.273%, which produces $7,837 in year one. Every full year after that is $12,537 at 3.636%.
A Commercial Building Placed in Service in September
You buy a small office building for $1,200,000 and add $18,000 of qualifying closing costs, for a cost basis of $1,218,000. With 25% allocated to land, the depreciable basis is $913,500, and the building is ready for tenants in September.
September’s first-year rate for 39-year property is 0.749%, or $6,842, followed by $23,422 a year at 2.564%.
The commercial building’s first-year number looks small only because it went into service late in the year. Its full-year deduction is close to twice the rental’s.
Depreciate Improvements and Shorter-Life Assets Separately
Anything you add after the purchase, and anything in the building that is not structural, follows its own schedule.
An improvement such as a new roof or furnace takes the same recovery period as the building, starting from the month the improvement is placed in service. Publication 527 shows a furnace installed in May on a rental house depreciated at the 2.273% May rate in its first year, on a line separate from the house.
Other assets in a rental carry shorter lives:
For commercial owners, qualified improvement property is 15-year property when placed in service after 2017. That class covers interior improvements to a nonresidential building made after the building was first placed in service, excluding enlargements, elevators and escalators, and the internal structural framework.
Our overview of accelerated depreciation schedules for building components shows how each of these classes is depreciated year by year.
Figure Depreciation for the Year You Sell
The mid-month convention applies on the way out too, so the year of sale gets a partial deduction.
Publication 946 multiplies a full year of depreciation by the months the property was in service that year over 12, counting the month of sale as half a month. If the rental in our example sells in March of a later year, the deduction for that year is $12,537 multiplied by 2.5 over 12, or about $2,612.
Every dollar of depreciation also lowers your basis, which raises your gain on the sale. IRS Topic 409 taxes unrecaptured section 1250 gain at a maximum 25% rate, and our breakdown of the depreciation recapture tax rate shows how that interacts with capital gains.
See How Cost Segregation Changes the First-Year Number
A cost segregation study keeps the same formula and changes how much basis goes into each recovery period.
Engineers identify components such as appliances, carpet, furniture, and site work like fences, sidewalks, and roads, then move them into 5-, 7-, or 15-year classes. Those classes qualify for 100% bonus depreciation when the property is acquired and placed in service after January 19, 2025, with the acquisition date set by the binding written contract.
Property acquired before that date falls under the earlier phase-down rates, which our breakdown of bonus depreciation under the One Big Beautiful Bill lays out by date. The law itself is H.R. 1 of the 119th Congress, signed July 4, 2025.
Take the May rental and assume, purely for illustration, that a study places 22% of the building basis, or $75,856, in 5- and 15-year property, under a 2026 contract and placement. Those components are deducted in full in year one, and the remaining $268,944 still runs on the 27.5-year table at the May rate.
What we see consistently is that the size of the deduction and your ability to use it are separate questions. Publication 527 treats rental activities as passive in most cases unless you qualify as a real estate professional, and our guide on whether cost segregation can offset W-2 income covers when the deduction reaches wages.
How Seneca Builds Your Component Schedule
At Seneca, here is what the cost segregation study process looks like for an owner who wants a component-level depreciation schedule.
Property Records and Closing Documents
We start with your closing statement, purchase price, placed-in-service date, and any improvement invoices, the same inputs Steps 1 through 4 rely on. Our engineering team builds your free preliminary savings estimate from that information about your specific building.
Onsite or Virtual Tour
The property tour can happen in person or by video, and the choice is yours. Onsite visits are common for commercial buildings, most residential owners find a virtual walkthrough works well, and our article on the benefits of virtual property tours covers how the remote option runs.
Engineered Report for Your CPA
Our engineers break the property into every component it contains and assign each one a cost and a recovery period, and our Head of Engineering reviews and signs off on the finished study before your CPA receives it. Provided we get timely collaboration from you, the report is delivered within 5 to 10 business days.
Avoid These Property Depreciation Mistakes
Most depreciation errors trace back to one of the six inputs, and each has a clear fix.
- ●Depreciating the full purchase price: a schedule built on the whole price overstates every year’s deduction because land never depreciates; allocate land by fair market value or the assessor’s ratio before you start.
- ●Starting on the closing date or the first lease: depreciation begins when the property is ready and available for rent, so a start date pegged to closing or to the first tenant can be months off; check the month against your repair and listing records.
- ●Using the wrong recovery period: a mixed-use or lodging property can miss the 80% dwelling-unit test and belong on the 39-year schedule, which changes every year’s figure; confirm the class before the first return.
- ●Leaving depreciation off a return: your basis drops by the depreciation you were entitled to whether or not you claimed it, so the skipped deduction still raises your gain on sale; have your CPA correct it in the current year.
- ●Folding improvements into the original building: a new roof or HVAC system added to the old line starts on the wrong date and the wrong rate; set it up as a separate asset with its own placed-in-service month.
Frequently Asked Questions
Below are the questions we hear most from owners working out depreciation on their own buildings.
Why Owners and CPAs Bring Depreciation Questions to Seneca
Seneca does cost segregation and nothing else, with an in-house engineering team that has assessed 10,200+ properties and has zero IRS audits triggered or lost. Every study includes a full component breakdown, audit defense, and sign-off from our Head of Engineering, and we also run Qualified Production Property (QPP) studies.
You work directly with a dedicated Project Manager, our Engineering team, and an Advisor, with real-time updates as your study moves through each stage. Our work spans small single-family rentals, multi-million-dollar homes, 120+ unit hotels, and office buildings over 40,000 square feet.
For a rough first number on your own property, run it through our cost segregation calculator.
Conclusion
Property depreciation for taxes follows the same path every time: cost basis, minus land, spread over 27.5 or 39 years from the month the building was ready for use. The IRS tables handle the mid-month math, and Form 4562 and Schedule E carry the result to your return.
The figure moves most on the inputs, so confirm your land allocation, property class, and placed-in-service month with your CPA before the first return goes out. A single building schedule is also only one way to depreciate a property.
If you want to see what a component-level schedule would do for your building, try the calculator or request a free estimate, and our engineers will walk you through the numbers before you commit.
