Written by Mission Realty Property Management
Depreciation is the largest tax benefit most rental property owners receive and the one they understand least. It is also counterintuitive: it lets you deduct an expense you did not actually pay in cash, in a year when your property may have gone up in value.
New landlords frequently leave it partly on the table, or misunderstand it badly enough that selling produces an unpleasant surprise. Both are avoidable.
Quick Answer
Depreciation lets a rental property owner deduct the cost of the building — not the land — over a set recovery period, which for residential rental property is 27.5 years under current federal rules. It is a non-cash deduction that reduces taxable rental income. When the property is sold, previously claimed depreciation is generally subject to recapture and taxed, which is why the benefit is best understood as a deferral rather than a permanent exemption.
What Depreciation Actually Is
The tax code treats a building as an asset that wears out over time. Rather than deducting its full cost in the year of purchase, you deduct a portion each year across a defined recovery period.
Two features make it distinctive:
It is non-cash. You are not writing a check. The deduction reduces taxable income without reducing the money in your account, which is why a property can generate positive cash flow while showing a smaller taxable profit or even a taxable loss.
Land is excluded. Land does not wear out, so it is not depreciable. Only the building and certain improvements are, which makes the split between land value and building value one of the more consequential numbers in your return.
Establishing Your Basis
Basis is what you depreciate, and getting it right matters more than most owners realize.
Generally, basis starts with your purchase price plus certain acquisition costs, then must be allocated between land and building. Only the building portion is depreciable.
Common approaches to the allocation include using the ratio reflected in the local property tax assessment, or an appraisal that separates the components. In Richmond, Henrico, Chesterfield, and Hanover, assessment records are publicly available and are a frequently used reference point.
Why the allocation matters: a higher land allocation means less depreciation each year. Land-to-building ratios vary considerably across the Richmond area — an infill lot in the Fan carries a very different land proportion than a similar house on a large parcel in Goochland. Applying a rule of thumb from an unrelated market can produce a figure that is meaningfully wrong.
Capital improvements you make later — a new roof, an HVAC system, an addition — are generally added to basis and depreciated, rather than deducted immediately. Ordinary repairs are different and are typically deducted in the year incurred. The line between a repair and an improvement is a recurring source of error and is worth reviewing with a CPA.
The Recovery Period
Residential rental property is currently depreciated over 27.5 years under the general system. Commercial property uses a longer period, and certain components can have shorter ones.
Depreciation begins when the property is placed in service — available and ready to rent — not necessarily when you bought it or when a resident moved in. A property purchased in March and made rent-ready in June generally starts depreciating in June.
The mechanics, including partial-year conventions, are set out in IRS Publication 527, which is the authoritative source and worth reading directly rather than relying on summaries.
Cost Segregation
Not everything in a building has to sit on the 27.5-year schedule. Certain components — some flooring, appliances, specific fixtures, and land improvements such as driveways and fencing — may qualify for shorter recovery periods.
A cost segregation study identifies and reclassifies these components, accelerating deductions into earlier years. The tradeoff is straightforward: a professional study costs money, so it makes economic sense mainly on higher-value properties or portfolios where the accelerated benefit clearly exceeds the fee.
For a typical single-family rental in the Richmond market, a full study frequently does not pencil. For larger multifamily or a substantial portfolio, it can. A CPA who handles real estate can tell you quickly whether your situation is in range.
Recapture: The Part People Miss
This is the section that produces surprises at closing.
When you sell, depreciation you claimed is generally subject to recapture and taxed — commonly at a rate that differs from the long-term capital gains rate applied to appreciation. In practical terms, the deduction you enjoyed for years is settled up when you exit.
Two points that catch owners out:
- Recapture applies to depreciation “allowed or allowable.” Meaning if you were entitled to claim it and did not, you can still face recapture on the amount you should have taken. Skipping depreciation does not avoid the consequence — it just forfeits the benefit.
- It changes the real return on a sale. Owners who model a sale using only capital gains treatment overstate the net proceeds.
A 1031 exchange is one mechanism that can defer these consequences when reinvesting in like-kind property, subject to strict rules and timelines. It is not a do-it-yourself transaction — it requires qualified intermediaries and precise compliance.
Passive Activity Rules
Rental activity is generally treated as passive for tax purposes, which limits how rental losses can offset other income. There are exceptions, including provisions for active participation subject to income thresholds, and different treatment for those who qualify as real estate professionals under the tax rules.
These rules are genuinely complex and highly fact-specific. If depreciation is producing paper losses you hope to use against other income, that is precisely the situation to discuss with a CPA rather than working from a general article — including this one.
Recordkeeping That Makes Depreciation Work
Depreciation is only as good as the records supporting it. Owners who reconstruct figures years later routinely lose deductions they were entitled to, or claim ones they cannot substantiate.
Keep permanently, not for seven years
Basis records follow the property for as long as you own it, and matter again when you sell. Keep the closing statement, the land and building allocation with the reasoning behind it, and every capital improvement invoice for the entire holding period. A roof replaced in year three affects the calculation in year twenty.
Separate repairs from improvements as you go
Deciding at tax time whether a $4,000 expenditure was a repair or an improvement, from a bank statement line alone, is guesswork. Note it when it happens: what was done, why, and whether it restored the property to working order or extended its life and value. Fixing a section of failed plumbing is generally a repair; repiping the house is generally an improvement.
Track the placed-in-service date
Document when the property became ready and available to rent. If you bought a property that needed work, the rehab period matters and the distinction between pre-service costs and post-service expenses affects treatment.
Keep appliance and system records
Purchase dates and costs for HVAC systems, water heaters, and appliances serve two purposes: they support depreciation treatment, and they are the same age inventory you need for maintenance planning. One set of records, two uses.
Reconcile monthly
Owners who categorize income and expenses monthly hand their CPA a clean file. Owners who arrive in April with a folder of receipts pay more in preparation fees and more in missed deductions. If you use a property manager, the year-end statement should give you most of this already — but confirm capital improvements are broken out separately from operating repairs, because they are treated differently and a lumped figure is not usable.
Frequently Asked Questions
How long do you depreciate a rental property?
Residential rental property is currently depreciated over 27.5 years under the general system. Only the building and qualifying improvements are depreciable, not land.
Can I skip depreciation to avoid recapture?
Generally no. Recapture applies to depreciation allowed or allowable, so declining to claim it typically forfeits the deduction without avoiding the eventual tax consequence.
How do I separate land value from building value?
Common methods include using the ratio from the local property tax assessment or obtaining an appraisal that separates components. Assessment records are publicly available in Richmond-area localities. Confirm your approach with a CPA.
When does depreciation start?
When the property is placed in service — ready and available to rent — which may differ from the purchase date.
Is a new roof depreciated or deducted?
A new roof is generally a capital improvement added to basis and depreciated, rather than deducted in the year paid. Ordinary repairs are typically deducted currently. The distinction is a common source of error.
Is cost segregation worth it for a single-family rental?
Often not, because study costs frequently exceed the benefit at that scale. It is more commonly worthwhile for larger multifamily properties or substantial portfolios.
Own Rental Property in the Richmond Area?
Good tax outcomes start with good records — accurate accounting of income, expenses, repairs, and capital improvements throughout the year, not reconstructed in April. That recordkeeping is part of what professional management provides.
Learn about our property management services, request a free rental analysis, or contact our team.
This article is general information, not tax or legal advice. Tax rules change and depend on individual circumstances. Consult a qualified CPA or tax attorney.