Depreciation for rental property is one of the most powerful tax benefits available to U.S. real estate investors, yet it’s often misunderstood or underutilized. If you’re worried about paying too much tax on rental income in 2026, depreciation could legally reduce your taxable income—even if your property value is rising.
What Is Depreciation for Rental Property?
Depreciation allows you to deduct the cost of a rental property over its useful life as defined by the IRS.
- For residential rental property: 27.5 years recovery period
- For commercial property: 39 years recovery period
This deduction is reported on Schedule E (Form 1040) and calculated using Form 4562.
Why Depreciation Is a Game-Changer for Investors
Depreciation is a non-cash expense, meaning:
- You reduce taxable income
- Without spending actual cash
Key benefits include:
- Lower federal and state taxes
- Offset rental income
- Improve after-tax cash flow
- Reduce audit risk with proper documentation
How Rental Property Depreciation Works (Step-by-Step)
Step 1: Determine Depreciable Basis
Only the building portion is depreciable—not land.
Example:
- Purchase Price: $500,000
- Land Value: $100,000
- Depreciable Basis: $400,000
Step 2: Apply the IRS Recovery Period
- Residential: $400,000 ÷ 27.5 = $14,545 per year
- Commercial: $400,000 ÷ 39 = $10,256 per year
Step 3: Report on IRS Forms
- Form 4562 – Depreciation calculation
- Schedule E – Rental income and expenses
Bonus Depreciation Rules for 2026
Bonus depreciation applies to certain components of rental property identified through cost segregation.
2026 outlook:
- Bonus depreciation continues to phase down
- Strategic planning is critical
Common assets eligible:
- Flooring
- Electrical systems
- Plumbing components
- Fixtures and appliances
Section 179 and Rental Property: Can You Use It?
Section 179 generally does not apply to residential rental buildings. However, it may apply to:
- Qualified improvement property (QBI)
- Certain equipment used in rental operations
This is claimed on Form 4562, subject to income limitations.
Read More: Real Estate Tax Deductions: The Complete 2026 Guide for Investors
Cost Segregation: Advanced Depreciation Strategy
Cost segregation breaks a property into components with shorter recovery periods (5, 7, or 15 years).
Best suited for:
- Properties over $500,000
- High-income investors
- Short-term rental owners
Benefits:
- Accelerated deductions
- Improved early-year cash flow
- Strong audit support when done correctly
What Happens to Depreciation When You Sell?
When you sell a rental property:
- Depreciation is recaptured under IRC Section 1250
- Taxed up to 25%
However, strategies like:
- 1031 exchanges
- Proper basis tracking
Can significantly reduce or defer tax impact.
Common Depreciation Mistakes to Avoid
- Not claiming depreciation at all
- Depreciating land value
- Incorrect recovery period
- Missing Form 4562
- Poor recordkeeping
Even if you missed depreciation earlier, you may fix it using Form 3115 (Change in Accounting Method).
Key Takeaways
- Depreciation for rental property reduces taxable income without a cash outflow
- Residential property is depreciated over 27.5 years
- Bonus depreciation and cost segregation can accelerate savings
- Proper IRS form filing is essential for compliance
- Strategic planning in 2026 is more important than ever
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