How does rental property depreciation work for taxes in 2025?

Depreciation allows rental property owners to deduct the cost of the building (not land) over its useful life, even though the property may actually be appreciating in value. This is one of the most powerful tax benefits in real estate investing.

How to calculate depreciation:

• Residential rental property: Depreciated over 27.5 years using the straight-line method
• Commercial property: Depreciated over 39 years
• Land is NOT depreciable. You must allocate your purchase price between building and land (typically 75-85% building, based on tax assessor records or appraisal)
• Example: You buy a rental for $300,000. Land is $50,000, building is $250,000. Annual depreciation: $250,000 / 27.5 = $9,091 per year

What else can you depreciate? Appliances, carpeting, and furniture are depreciated over 5-7 years. Improvements (new roof, HVAC system, renovations) are depreciated over 27.5 years. Repairs (fixing a leaky faucet, patching drywall) are deducted in full in the year incurred.

Depreciation recapture: When you sell the property, you must "recapture" all depreciation taken (or that should have been taken) and pay tax on it at a rate of 25% (Section 1250). This is in addition to any capital gains tax. For example, if you claimed $50,000 in depreciation, you owe $12,500 in recapture tax at sale, regardless of your income level.

Passive activity rules: Rental income is generally passive. Losses can offset other passive income but are limited against W-2/active income. Exception: if your AGI is under $100,000 and you actively participate, you can deduct up to $25,000 in rental losses. This phases out completely at $150,000 AGI. Real estate professionals who spend 750+ hours per year can deduct unlimited rental losses against any income.