Definition
Real estate depreciation is the annual deduction that lets owners recover the cost of an income property over a set number of years.
How It Works
The building portion, not the land, is depreciated over 27.5 years for residential rental or 39 years for commercial property. The deduction reduces taxable rental income each year even though the property may be rising in value.
Example
An owner of a $1 million rental, with $800,000 allocated to the building, deducts roughly $29,000 per year in straight-line depreciation.
When It Works Best
Its value increases when combined with cost segregation and bonus depreciation, which accelerate the deductions.
Who It Applies To
Owners of income-producing real estate.
Watch-Outs
Depreciation lowers basis and is recaptured at sale, and passive activity rules can limit who can use the deductions against other income.
