How is rental property depreciation calculated?

The building — not the land — divided by the recovery period, straight line. Residential is 27.5 years, commercial 39. The first year is prorated by the mid-month convention, so a property placed in service in April gets 8.5 months of deduction rather than nine. Land is never depreciable, which is why the allocation between land and building matters.

Is depreciation free money?

No. It is a deferral plus a rate arbitrage. Every dollar deducted during the hold is added back at sale as recapture — you did not avoid the tax, you moved it. What you genuinely keep is the gap between the rate you deducted at and the rate you repay at, plus the time value of having had the money in between.

What is depreciation recapture?

At sale, the depreciation you claimed is taxed, capped at 25% federally for real property. On the default scenario $40,812 of tax saved during the hold comes back as $31,884 of recapture. The remaining $8,928 is the permanent benefit — the seven points between a 32% deduction and a 25% repayment.

Can depreciation cost more than it saves?

Yes, and the tool flags it. If your marginal rate is below the recapture rate — a 22% bracket against 25% recapture — every dollar deducted costs three points more to repay than it saved. The deferral still has time value, so it can remain worthwhile, but the rate trade is running against you and that is worth knowing.

Is a cost segregation study worth it?

It depends on what the acceleration is actually worth, which is much less than the headline. A study reclassifies part of the building into shorter-life property so more can be deducted early. It creates no new deductions and reduces no recapture — it moves timing. On the default scenario it pulls $65,320 into year one, defers $20,902 of tax, and the genuine gain is the time value: about $1,367. Set that against the cost of the study.

Does depreciation apply if I have passive losses I cannot use?

That is exactly where this calculator stops being useful. Passive activity loss rules, real estate professional status, income phase-outs and at-risk limits all determine whether a deduction is usable this year or suspended. None of it is modelled here, and any of it can change the answer entirely. Take these figures to an accountant rather than acting on them.

Depreciation Calculator

What it saves, what comes back, and the only part you actually keep.

The property

Purchase price

Land allocation

Capital improvements

Placed in service

Property class

Residential · 27.5 yrCommercial · 39 yr

Land is never depreciable. The allocation between land and building comes from the tax assessor’s split or an appraisal, not from a guess.

Cost segregation

Run a cost segregation study

Reclassified

Taken as bonus

A study reclassifies part of the building into shorter-life property so more can be deducted early. It does not create deductions — it moves them.

Your position

Marginal rate32%

Recapture rate25%

Years held8 yr

Discount rate7%

Tax saved while you hold

$40,812

$127,538 deducted at 32.00%

Handed back at sale

$31,884

Recapture at 25.00%

7.00% of permanent benefit per dollar deducted. You deduct at your marginal rate and repay at the recapture rate. The gap is the only part that never comes back — everything else is timing.

Depreciation, recapture and net benefit
Depreciable basis	$455,000$105,000 of land excluded
Annual deduction	$16,545First year $11,720 — mid-month convention
Deducted over the hold	$127,538
Net benefit, undiscounted	$8,928
Net benefit, present value	$22,2550.17 per dollar deducted — the deferral is most of the value
First year with cost seg	$77,040$65,320 more than straight-line
What the acceleration is worth	$1,367Not the $20,902 deferred — only the time value of having it sooner

Informational arithmetic, not tax advice. Depreciation interacts with passive activity loss rules, real estate professional status, income phase-outs, at-risk limits and state treatment — none of which are modelled here, and any of which can change the answer entirely. Talk to your accountant before acting on any of this.

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Depreciation is a loan, not a gift

Depreciation gets sold as the great advantage of owning real estate: a deduction for an expense you never actually paid, sheltering income that would otherwise be taxed. The deduction is real. The framing is not.

Depreciation is two things, and only one of them is a benefit.

It is a deferral. Every dollar deducted during the hold is added back at sale as recapture. On the default scenario, eight years of deductions save $40,812 in tax — and $31,884 of that comes straight back when you sell. You did not avoid the tax. You borrowed it.

And it is a rate arbitrage, which is the part that is genuinely, permanently yours. The deduction comes off at your marginal rate; the recapture goes back on at the recapture rate, capped at 25%. Deduct at 32% and repay at 25% and you keep seven points per dollar, forever. On these numbers that is $8,928.

Which means the benefit depends on a variable most people never check: their own bracket. Drag the marginal rate down to 22% and the arbitrage inverts — you deduct at 22% and repay at 25%, losing three points on every dollar. The deferral still has time value, so the position can stay positive overall, but the rate trade is working against you and nobody selling the strategy mentions that it can.

The time value is in fact where most of the value lives. Undiscounted, the net benefit here is $8,928. Discount the recapture back over the eight-year hold and it is $22,255 — about 17 cents of present value per dollar deducted. Having the money for eight years is worth more than the rate gap itself.

That reframes cost segregation honestly. A study reclassifies part of the building into shorter-life property so more can be deducted early. It creates no new deductions and it reduces no recapture — a test in this codebase asserts the recapture figure is identical with the study and without it. What it does is move timing.

So the question is what that movement is worth. On the default scenario it pulls $65,320 into year one and defers $20,902 of tax — and the actual gain is the time value of having it sooner, roughly $1,367. That is the number to set against the cost of the study, not the $20,902. Studies still often pay for themselves on larger properties or higher brackets; the point is to compare against the right figure.

Where this calculator stops: passive activity loss rules, real estate professional status, income phase-outs and at-risk limits decide whether a deduction is usable this year at all. None of that is modelled. If you are selling, the 1031 calculator shows how recapture rolls forward instead of coming due.

Methodology

Depreciable basis = purchase price × (1 − land allocation) + capital improvements.
Annual deduction = basis ÷ recovery period, straight line — 27.5 years residential, 39 commercial.
First year uses the mid-month convention: the month of placement counts as half.
Net benefit = tax saved at the marginal rate less recapture at the recapture rate. The present-value figure discounts the recapture back over the hold, since it lands at sale.
Cost segregation reclassifies a share of basis, takes a bonus percentage of it in year one, and depreciates the remainder on the long schedule. Its value is reported as the time-value gain, not the deduction.

Not modelled: passive activity loss limits, real estate professional status, at-risk rules, income phase-outs, state conformity, Section 1250 versus 1245 treatment on the reclassified components, or bonus depreciation phase-downs. This is arithmetic, not a tax opinion.

Frequently asked questions

How is rental property depreciation calculated?: The building — not the land — divided by the recovery period, straight line. Residential is 27.5 years, commercial 39. The first year is prorated by the mid-month convention, so a property placed in service in April gets 8.5 months of deduction rather than nine. Land is never depreciable, which is why the allocation between land and building matters.
Is depreciation free money?: No. It is a deferral plus a rate arbitrage. Every dollar deducted during the hold is added back at sale as recapture — you did not avoid the tax, you moved it. What you genuinely keep is the gap between the rate you deducted at and the rate you repay at, plus the time value of having had the money in between.
What is depreciation recapture?: At sale, the depreciation you claimed is taxed, capped at 25% federally for real property. On the default scenario $40,812 of tax saved during the hold comes back as $31,884 of recapture. The remaining $8,928 is the permanent benefit — the seven points between a 32% deduction and a 25% repayment.
Can depreciation cost more than it saves?: Yes, and the tool flags it. If your marginal rate is below the recapture rate — a 22% bracket against 25% recapture — every dollar deducted costs three points more to repay than it saved. The deferral still has time value, so it can remain worthwhile, but the rate trade is running against you and that is worth knowing.
Is a cost segregation study worth it?: It depends on what the acceleration is actually worth, which is much less than the headline. A study reclassifies part of the building into shorter-life property so more can be deducted early. It creates no new deductions and reduces no recapture — it moves timing. On the default scenario it pulls $65,320 into year one, defers $20,902 of tax, and the genuine gain is the time value: about $1,367. Set that against the cost of the study.
Does depreciation apply if I have passive losses I cannot use?: That is exactly where this calculator stops being useful. Passive activity loss rules, real estate professional status, income phase-outs and at-risk limits all determine whether a deduction is usable this year or suspended. None of it is modelled here, and any of it can change the answer entirely. Take these figures to an accountant rather than acting on them.

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