Your rental property is putting money in your pocket, but the IRS wants their share. The good news: depreciation is one of the most powerful tools in the tax code for real estate investors—and the rules just got even better. With the One Big Beautiful Bill Act (OBBBA) of 2025 making 100% bonus depreciation permanent and doubling Section 179 limits, now is the perfect time to make sure you’re capturing every dollar of tax savings from your rentals.

What Is Rental Property Depreciation?

Depreciation is the IRS’s way of recognizing that a building won’t last forever. Over time, it wears down, needs repairs, and eventually has to be replaced. To account for this, the IRS lets you deduct part of your building’s cost every year as a business expense—even though you’re not actually spending cash when you take the deduction.

Example: You purchase a rental property for $275,000. Of that, $50,000 is allocated to land (which is not depreciable), leaving $225,000 for the building. Residential rental property is depreciated over 27.5 years using the straight-line method under the IRS’s MACRS rules.

That means:

• Depreciable basis: $225,000

• Annual deduction: $8,182 ($225,000 ÷ 27.5)

So, each year you can reduce your taxable rental income by $8,182—without writing a single check.

The Key Rule: Only the building and qualifying improvements get depreciated. The land itself never does.

How Long Do You Depreciate Rental Property?

The IRS sets specific recovery periods depending on the type of property:

What counts as residential vs. nonresidential?

• Residential: Single-family homes, duplexes, apartments, condos—any property where at least 80% of rental income comes from dwelling units.

• Nonresidential: Office buildings, retail space, warehouses, or mixed-use buildings where less than 80% of income comes from dwelling units.

Important: Only the building and improvements are depreciable. Land itself never is.

What Can You Depreciate on Rental Property?

Depreciable (Building + Improvements):

• Building structure itself

• Built-in appliances (dishwashers, garbage disposals)

• Flooring, windows, and doors

• Plumbing, electrical systems, HVAC

• Roof, gutters, siding

• Fencing, driveways, sidewalks

• Major renovations and improvements

Not Depreciable (Land + Personal Items):

• Raw land value (the dirt itself never depreciates)

• Furniture and portable appliances (removable washers, dryers)

Special Categories with Different Rules:

• Appliances & personal property: 5–7 years

• Land improvements (15-year property): sidewalks, fences, driveways, grading, irrigation systems, and certain landscaping (e.g., trees and shrubbery that are permanent improvements).

• Planning note: Under the One Big Beautiful Bill Act of 2025, these land improvements are eligible for 100% bonus depreciation, meaning you can deduct the full cost in the year they’re placed in service.

• Major building systems (e.g., HVAC, plumbing): may qualify for cost segregation studies to accelerate depreciation

Rule of thumb: If it’s permanently attached to the property and increases its value, it’s usually depreciable.

How to Calculate Rental Property Depreciation

Here's the step-by-step process:

Step 1: Determine Your Property's Basis

Your basis is generally what you paid for the property, plus closing costs and improvements, minus the value of the land.

Example:

• Purchase price: $300,000

• Closing costs: $8,000

• Total basis: $308,000

• Land value: $58,000

• Depreciable basis: $250,000

Step 2: Apply the Recovery Period

For residential rental property: $250,000 ÷ 27.5 years = $9,091 annual depreciation

Step 3: Apply the Mid-Month Convention

The IRS assumes you placed the property in service in the middle of the month you actually started renting it. This affects your first and last year of depreciation.

First-year depreciation table (percentage of full year):

• January: 11.5 months (95.83%)

• February: 10.5 months (87.50%)

• March: 9.5 months (79.17%)

• April: 8.5 months (70.83%)

• May: 7.5 months (62.50%)

• June: 6.5 months (54.17%)

• July: 5.5 months (45.83%)

• August: 4.5 months (37.50%)

• September: 3.5 months (29.17%)

• October: 2.5 months (20.83%)

• November: 1.5 months (12.50%)

• December: 0.5 months (4.17%)

If you placed a $250,000 basis property in service in June, your first-year depreciation would be: $9,091 × 54.17% = $4,924

2025 Tax Law Changes That Matter

Thanks to the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, real estate investors now have new and permanent ways to maximize tax savings. The OBBBA introduced several significant changes, including permanent extensions and higher limits for key deductions. Here’s what you need to know:

100% Bonus Depreciation Made Permanent: Effective for property acquired after January 19, 2025, you can immediately expense 100% of eligible personal property in the year it’s placed in service. This includes appliances, carpets, HVAC systems—essentially anything with a recovery period of 20 years or less. The building structure itself is still depreciated over 27.5 years.

Higher Section 179 Expensing Limits: Section 179 expensing limits were doubled under the OBBBA. Starting in 2025, the deduction cap is $2.5 million, with a $4 million phase-out threshold. This provides much more room to immediately expense qualified improvements to your rental properties, although the building structure itself still doesn’t qualify.

Special Note on Production Property: The OBBBA also introduced a new 100% depreciation election for certain real property used in manufacturing or production. While this doesn’t apply to standard rental buildings, it’s worth noting for mixed-use investors or those with other business property.

Note: The OBBBA also introduced a special 100% depreciation election for certain manufacturing and production real property, but this does not apply to typical rental buildings.

Advanced Depreciation Strategies

Cost Segregation Studies

A cost segregation study breaks down your building into components with shorter recovery periods, letting you accelerate depreciation and front-load deductions.

• Standard approach: Depreciate the entire building over 27.5 years.

• With cost segregation: Reclassify certain assets into 5-, 7-, or 15-year categories.

Example: On a $500,000 rental property, a cost segregation study might identify:

• Without cost segregation: $150,000 depreciated over 27.5 years = $5,455/year.

• With cost segregation: Much larger upfront deductions, especially powerful with 100% bonus depreciation now permanent.

When it makes sense: Properties worth $500,000+, recent purchases, or major renovations.

Important caveat: Accelerated depreciation can generate large paper losses, but many investors can’t use them right away due to the passive loss limits (Form 8582). Unless you qualify as a real estate professional or have passive income to offset, some of these deductions may be suspended and carried forward. We’ll cover how those passive loss rules work in more detail below.

Repairs vs. Improvements

Getting this distinction right can save (or cost) thousands in taxes.

Repairs (deduct immediately):

• Fixing a broken window

• Patching a roof leak

• Painting a single room

• Unclogging plumbing

Improvements (depreciate over time):

• Replacing the entire roof

• Adding a new bathroom

• Installing central air conditioning

• Major kitchen renovation

IRS test: If the work restores, adapts, or enhances the property, it’s usually an improvement and must be depreciated.

Common Depreciation Mistakes to Avoid

Forgetting to Claim Depreciation: You must claim depreciation every year you're entitled to it. If you don't, the IRS still treats it as if you did when you sell the property. You lose the tax benefit now but still owe depreciation recapture later.

Not Separating Land Value: Always get a proper allocation between land and building. Higher building value = more depreciation.

Mixing Personal and Business Use: You can only depreciate the business-use portion. If you use part of your rental property personally, adjust your depreciation accordingly.

Poor Record Keeping: Keep detailed records of all property purchases, improvements, and repairs. You'll need them for depreciation calculations and when you sell.

Placing property in service: You can’t start depreciation until the property is ready and available to rent—even if it sits vacant.

What Happens When You Sell?

When you sell your rental property, you'll deal with something called depreciation recapture. Here's what it means:

The IRS will "recapture" (tax) the depreciation you claimed over the years at a rate up to 25%. So if you claimed $50,000 in depreciation, you might pay $12,500 in additional taxes when you sell.

Example: Let’s say you bought a rental property for $200,000 and claimed $40,000 of depreciation over several years. Your adjusted basis in the property is now $160,000 ($200,000 – $40,000). If you sell the property for $250,000, your total gain is $90,000 ($250,000 – $160,000).

Here’s how the IRS breaks it down:

• Depreciation recapture: $40,000 is taxed at a rate of up to 25%

• Capital gain: The remaining $50,000 is taxed at the applicable long-term capital gains rates

This is why skipping depreciation is a lose-lose—you don’t save on taxes today, but you still get hit with recapture later when you sell.

Ways to defer recapture:

• 1031 exchanges: Swap for another investment property

• Installment sales: Spread the gain over multiple years

• Opportunity zones: If investing in qualified areas

While these strategies don’t eliminate tax forever, they can defer or spread it out, preserving cash flow.

Maximizing Your Rental Property Tax Strategy

Depreciation is just one piece of your rental property tax puzzle. Here are other strategies many investors overlook:

Passive Loss Rules

Remember the cost segregation example earlier? Accelerated depreciation can create large paper losses, but whether you can actually use those losses right away depends on the passive loss rules.

• Up to $25,000 allowance: If you actively participate in your rentals and your income is under $100,000, you may be able to deduct up to $25,000 of rental losses against other income.

• Phaseout: This allowance phases out between $100,000 and $150,000 of modified adjusted gross income (MAGI). Above $150,000, the allowance is gone.

• Carryforwards: Losses you can’t use now aren’t lost forever. They carry forward and can offset future rental income or gains when you sell the property.

Key tool: Form 8582 is where real estate investors track these passive activity losses and determine how much they can deduct each year.

Proper Entity Structure

The entity you choose won’t change how depreciation itself is calculated—the IRS rules for 27.5-year residential and 39-year commercial property apply no matter what. But your structure can affect how depreciation deductions flow through and how well your assets are protected.

• LLC: The most common setup for holding rentals. It doesn’t change your depreciation deductions, but it provides liability protection and flexibility in how income and losses are allocated. Depreciation passes through to the members’ personal tax returns.

• S Corporation: An S corp generally isn’t used for rentals, unless you also qualify as a real estate professional, because passive rental income usually doesn’t mesh well with payroll requirements. However, if you’re a real estate professional with other active income, an S corp can sometimes help optimize the 20% Qualified Business Income (QBI) deduction.

• Partnerships / Multi-member LLCs: Useful for joint ownership. Depreciation is allocated to partners according to the partnership agreement—so structuring that agreement carefully matters.

Takeaway: Your entity doesn’t change how much depreciation you get, but it can change how those deductions are used and how well your rental assets are shielded from risk.

Strategic Timing

Tax savings often come down to timing:

• Place a property in service before year-end to start depreciation early.

• Time improvements to maximize Section 179 or bonus depreciation.

• Plan property sales to spread out taxable gains or pair them with losses.

Record Keeping for Rental Property Depreciation

Good records mean smoother tax prep, stronger audit protection, and fewer headaches down the road. At a minimum, you’ll want to keep:

For each property:

• Purchase contract and closing statement

• Appraisal or allocation separating land vs. building values

• All improvement receipts and invoices

• Repair and maintenance records

• Property tax statements

• Insurance policies and claims

Annual documentation:

• Rental income and expense records

• Depreciation schedules (Form 4562)

• Any bonus depreciation or Section 179 elections

Entity-specific tracking:

• LLCs/Partnerships: Keep detailed capital account and basis records for each member; depreciation deductions must be allocated according to the operating agreement.

• S Corporations: Track shareholder basis carefully to ensure losses (including depreciation) are deductible.

• Single-member LLCs/Sole ownership: Simpler reporting, but you’ll still need to maintain proof of basis adjustments from improvements.

Pro tip: Digital tools can auto-categorize expenses and sync with tax software, creating a clean paper trail for the IRS.

Why it matters: Accurate records don’t just support annual deductions—they’re critical when calculating depreciation recapture at the time of sale. Without a solid paper trail, you risk overstating gain and paying more tax than necessary.

How Town Helps Real Estate Investors

Rental property tax rules are complex, and generic tax software isn’t designed to handle them well. Too often, investors leave thousands on the table by missing depreciation opportunities, misclassifying expenses, or overlooking how depreciation recapture will hit them at sale.

At Town, our dedicated real estate tax professionals know this landscape inside and out. We don’t just file returns—we build strategies that help investors keep more of what they earn.

What makes Town different:

• Specialized expertise: Our CPAs focus specifically on real estate taxation, from setting up depreciation schedules to navigating passive loss limits.

• Year-round support: We’re not a seasonal shop. We’re here anytime you’re evaluating a new property, planning major improvements, or weighing a potential sale.

• Technology advantage: Our AI-powered platform syncs with property management software to auto-categorize expenses, while our tax pros review for accuracy and opportunities others miss.

Whether you own one rental or a growing portfolio, we dig deep to maximize every deductible dollar—optimizing closing costs, timing improvements, and planning across multiple tax years so you’re always ahead of the curve.

Take Action on Your Rental Property Taxes

Depreciation is one of real estate’s most powerful tax advantages—but only if you use it correctly. With 100% bonus depreciation now permanent and Section 179 limits doubled under the One Big Beautiful Bill Act, 2025 is the year to get proactive about your rental property tax strategy.

Done right, depreciation is a gift that can save you thousands every year. Done wrong, it can mean missed deductions or painful IRS adjustments when you sell.

Don’t let another year slip by leaving money on the table. Now is the time to:

• Review your current depreciation schedules

• Consider whether a cost segregation study makes sense

• Tighten up your record keeping to prepare for depreciation recapture down the road

Ready to see how much you could be saving—and avoid costly mistakes? Connect with Town’s real estate tax specialists today and discover strategies tailored to your portfolio, so you keep more of your rental income where it belongs: in your pocket.

Disclaimer: This content is for educational purposes only and should not be considered personalized tax advice. Tax laws are complex and may change. Individual circumstances vary, and strategies that benefit one taxpayer may not be appropriate for another. Always consult a qualified tax professional before making decisions.