Rental Depreciation Calculator Formula

Understand the math behind the rental depreciation calculator. Each variable explained with a worked example.

Use the Rental Depreciation Calculator

Formulas Used

Annual Depreciation Deduction

annual_depr = annual_depreciation

Monthly Depreciation

monthly_depr = monthly_depreciation

Annual Tax Savings

tax_savings_annual = annual_depreciation * marginal_tax_rate / 100

Depreciable Basis

depr_basis = depreciable_basis

Total Depreciation (27.5 years)

total_depreciation = depreciable_basis

Land as % of Purchase

land_pct = land_value / purchase_price * 100

Variables

VariableDescriptionDefault
purchase_priceProperty Purchase Price(USD)350000
land_valueLand Value(USD)70000
closing_costs_capitalizedCapitalized Closing Costs(USD)5000
improvementsCapital Improvements Added(USD)0
marginal_tax_rateMarginal Tax Rate(%)32
depreciable_basisDerived value= purchase_price - land_value + closing_costs_capitalized + improvementscalculated
annual_depreciationDerived value= depreciable_basis / 27.5calculated
monthly_depreciationDerived value= annual_depreciation / 12calculated

How It Works

Rental Property Depreciation

The IRS allows residential rental property owners to deduct the cost of the building over 27.5 years using straight-line depreciation.

Formula

Annual Depreciation = Depreciable Basis / 27.5

Depreciable Basis = Purchase Price - Land Value + Capitalized Costs + Improvements

Key Rules

  • Land is never depreciable
  • Depreciation begins when the property is placed in service (available for rent)
  • The first and last year use a mid-month convention (partial year)
  • Depreciation is mandatory even if not claimed (recaptured at sale)

    • Land Value Allocation

    The IRS requires a reasonable allocation between land and building. Methods include:

  • County tax assessment ratios
  • Appraisal allocation
  • Comparable land sales

    • Worked Example

    Purchased a rental for $350,000 with $70,000 land value, $5,000 capitalized closing costs, no improvements. 32% tax bracket.

    purchase_price = 350000land_value = 70000closing_costs_capitalized = 5000improvements = 0marginal_tax_rate = 32
    1. 01Depreciable basis: $350,000 - $70,000 + $5,000 = $285,000
    2. 02Annual depreciation: $285,000 / 27.5 = $10,364
    3. 03Monthly depreciation: $10,364 / 12 = $863.64
    4. 04Annual tax savings: $10,364 x 32% = $3,316
    5. 05Land as % of purchase: $70,000 / $350,000 = 20.0%
    6. 06Total depreciation over 27.5 years: $285,000

    Frequently Asked Questions

    Do I have to depreciate my rental property?

    The IRS considers depreciation mandatory whether or not you claim it. If you do not take the deduction, you still must reduce your basis by the allowable amount. This means you will face depreciation recapture at sale regardless, so always claim the deduction.

    What happens to depreciation when I sell?

    Accumulated depreciation reduces your cost basis. When you sell, the gain attributable to depreciation is recaptured at a 25% tax rate (Section 1250 recapture). The remaining gain is taxed at long-term capital gains rates.

    How do I determine land value?

    Use the county tax assessment allocation ratio. If the county assesses land at 25% of total value on a $400,000 property, land is $100,000 and building is $300,000. An independent appraisal or comparable land sales are alternative methods.

    Ready to run the numbers?

    Open Rental Depreciation Calculator