Rental Property Depreciation Basics: The 27.5-Year Rule

Depreciation is the largest expense many landlords never write a check for. When you buy a rental home, you can’t deduct the price in the year you buy it. Instead, the tax rules spread the cost of the building over many years, and each year’s share becomes an expense on your Schedule E. Because it’s a calculation rather than a payment, it’s easy to get wrong or forget altogether.

This guide covers the basic rules for a residential rental under the 2025 IRS publications: what can be depreciated, the 27.5-year schedule, a worked example, and the records that make it hold up later.

Why rental property is depreciated

A building wears out. The tax rules recognise that by letting you recover its cost gradually as an expense, rather than all at once. For a residential rental property, Publication 527 (2025) says the building is recovered using the straight-line method over 27.5 years under the general depreciation system. Publication 946 is the IRS’s full guide to depreciation.

Straight line means the same amount each full year. A building with a depreciable basis of $275,000 would give $10,000 a year for 27.5 years.

Land isn’t depreciable

The first thing to get right is that land doesn’t depreciate. The IRS treats it as something that doesn’t wear out, so its cost is never an expense, however long you own it. When you buy a rental, the price covers both the land and the building on it, and you have to split the two.

Common ways owners make that split include:

• The land and building values on the local property tax assessment, applied as a ratio to what you paid.
• An appraisal that values them separately.

Whichever you use, write down how you did it and keep the document. The split decides every year’s depreciation, so it’s worth doing carefully once.

Basis: the number you depreciate

Your basis is, roughly, what the building cost you. It generally starts with the purchase price and is adjusted by certain costs of buying the property. Publication 527 lists which settlement costs are added to basis and which aren’t, and its rules are the ones to follow.

Improvements you make later, such as a new roof or an addition, are added to basis too, generally as their own depreciable items with their own start date. Ordinary repairs aren’t; they’re expenses in the year you pay them. The difference between the two is a topic of its own.

If a home was your residence before you rented it out, the basis rules are different: the IRS generally uses the lower of your adjusted basis or the fair market value when you converted it. Publication 527 explains this case, and it’s a good one to work through with a tax professional.

When depreciation starts

Depreciation begins when the property is placed in service, which for a rental means ready and available to rent, not the day you buy it or the day the first tenant moves in. A home bought in March and advertised for rent in May is placed in service in May.

The first and last years are partial years. The IRS uses a convention for residential rental property that counts a partial month in the year you place it in service, and Publication 946 has tables showing the percentage for each starting month. Use those tables, or tax software, rather than dividing by 12 yourself.

A worked example

Jordan buys a small house to rent out.

• Purchase price, including the costs added to basis: $300,000.
• Land share, from the tax assessment ratio: 20%, or $60,000.
• Building basis: $240,000.

Each full year, straight-line depreciation over 27.5 years is $240,000 divided by 27.5, which is about $8,727.27. In the year Jordan places the house in service, the amount is less, depending on the month, from the Publication 946 tables.

Now suppose Jordan’s rent for a full year is $24,000 and the cash expenses (mortgage interest, insurance, property tax, repairs) come to $13,000. Before depreciation, the house shows $11,000 of net rental income. After depreciation, it shows about $2,273. That gap is why depreciation matters: it’s a real expense on Schedule E, recorded on line 18 of the 2025 form, even though no money left the bank for it.

Depreciation follows you when you sell

When you sell a rental, the depreciation you were allowed to take reduces your basis, which increases your gain. The tax rules treat that part of the gain differently from the rest. That’s an important reason to track depreciation accurately every year: it affects your tax when you sell, whether or not you claimed it each year. A tax professional can explain how this applies to you before you sell.

Records to keep

Depreciation runs for decades, so its records need to last longer than most. The IRS says to keep records relating to property until the period of limitations expires for the year in which you dispose of it (how long should I keep records). For a rental, keep:

• The closing statement from the purchase.
• How you split land and building, with the supporting document.
• The date the home was placed in service.
• Each improvement: what it was, the invoice, the date and the amount.
• A depreciation schedule showing each item, its basis, method, start date and the amount taken each year.

Store digital copies somewhere you’ll still be able to open in twenty years, not only in one email account.

When to call a professional

Depreciation is a good place to get help, at least for the setup. In particular, ask a tax professional when:

• You converted your home to a rental.
• You’re unsure how to split land and building.
• You’ve bought furniture or appliances for the rental, which can follow different recovery periods.
• You’ve missed depreciation in earlier years.
• You’re planning to sell.

Where Kemback fits

Rental Houses, part of Kemback Business, keeps each home’s income and expenses on their Schedule E lines and produces Schedule E lines per home for a tax year, as CSV and a printable page. Kemback doesn’t calculate depreciation: you enter each year’s figure by hand, from your own schedule or your preparer’s. Mortgages are amortized, so each payment’s interest is separated from principal and escrow. See the pricing page.

This post is general information, not tax advice. Depreciation rules are detailed and depend on your situation; check with a qualified tax professional before you claim it.

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This article is general information, not financial, tax or legal advice. For decisions about your situation, talk to a qualified professional.