Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Only the building portion of a rental property depreciates for tax purposes, not the land it sits on, since land isn't considered a wearing asset. So the depreciable basis requires separating the purchase price into land and building components before any depreciation schedule can be calculated correctly.
Before you rely on it
What to check
Confirm the land-versus-building allocation used reflects a reasonable, defensible split, often based on property tax assessment ratios, rather than an arbitrary guess.
The common error
Where people go wrong with rental property depreciation calculator
Depreciating the full purchase price including the land value. Land doesn't depreciate under the tax rules, and including it overstates the annual depreciation deduction and the resulting tax effect.
Sensitivity evidence
How property purchase price changes the estimated annual depreciation
| Property purchase price | Estimated annual depreciation | Estimated current tax effect | Depreciable basis |
|---|---|---|---|
| $320,000 | $9,455 | $2,269 | $260,000 |
| $360,000 | $10,909 | $2,618 | $300,000 |
| $400,000worked example | $12,364 | $2,967 | $340,000 |
| $440,000 | $13,818 | $3,316 | $380,000 |
| $480,000 | $15,273 | $3,665 | $420,000 |
Every input, tested
Which input moves the estimated annual depreciation most
| Input | Tested from | To | Estimated annual depreciation at each end | Swing |
|---|---|---|---|---|
| Applicable recovery period | 21.0 years | 35.0 years | $16,190 to $9,714 | $6,476 (52%) |
| Property purchase price | $360,000 | $440,000 | $10,909 to $13,818 | $2,909 (24%) |
| Land value | $72,000 | $88,000 | $12,655 to $12,073 | $582 (4.7%) |
| Capitalized acquisition and improvement costs | $18,000 | $22,000 | $12,291 to $12,436 | $145 (1.2%) |
| Estimated marginal tax rate | 22.0% | 26.0% | $12,364 to $12,364 | none |
Two variables at once
Estimated annual depreciation by property purchase price and land value
| Property purchase price \ Land value | $64,000 | $80,000 | $96,000 |
|---|---|---|---|
| $320,000 | $10,036 | $9,455 | $8,873 |
| $360,000 | $11,491 | $10,909 | $10,327 |
| $400,000 | $12,945 | $12,364 | $11,782 |
| $440,000 | $14,400 | $13,818 | $13,236 |
| $480,000 | $15,855 | $15,273 | $14,691 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Property purchase price | $400,000 |
| Land value | $80,000 |
| Capitalized acquisition and improvement costs | $20,000 |
| Applicable recovery period | 27.5 years |
| Estimated marginal tax rate | 24.0% |
| Estimated annual depreciation | $12,364 |
| Estimated current tax effect | $2,967 |
| Depreciable basis | $340,000 |
Where the inputs come from
Property purchase price and land value give the building's share, because land does not depreciate; the county assessor's split between land and improvements is a reasonable guide. Capitalized acquisition and improvement costs are closing costs and renovations that add to the depreciable basis. The recovery period is 27.5 years for residential rental property and 39 years for commercial property. The marginal tax rate estimates the value of the deduction.
Using the estimated annual depreciation in a real decision
When you sell, depreciation is recaptured and taxed at up to 25%, and it reduces your basis, so it defers tax more than it eliminates it.
When the result stops applying
Depreciation starts in the month the property is placed in service and uses a mid-month convention, so the first and last years differ. Passive loss rules can limit use of the deduction if income is high. Cost segregation studies can accelerate depreciation of components. You must take depreciation whether or not you claim it, since it reduces basis anyway.
What to compare it with
See the sale side with the capital gains calculator and the 1031 exchange boot page, and the return with the rental property ROI calculator. The business depreciation calculators explain the straight-line method. A tax professional can advise on passive loss rules and cost segregation.
People also ask
Frequently asked questions
Can I depreciate land?
No. Only the building and improvements are depreciable, so you must separate land value from the purchase price.
What is depreciation recapture?
When you sell, the depreciation you took is taxed at up to 25%, and it is charged whether or not you claimed the deductions.
How long do I depreciate a rental property?
27.5 years for residential rentals and 39 years for commercial buildings, using straight-line depreciation with a mid-month convention in the first and last years.