Depreciation of Real Estate Property

Depreciation of real estate property allows you to recover the cost of the property over time, providing a valuable tax deduction that can significantly reduce your taxable income. Depreciation is an accounting method that allocates the cost of a tangible asset over its useful life. For real estate, this means you can deduct a portion of the property’s cost each year, reflecting its wear and tear, deterioration, or obsolescence. The IRS recognizes depreciation as a non-cash expense, meaning it reduces taxable income without affecting cash flow.

Residential Rental Property

Typically depreciated over 27.5 years using the Modified Accelerated Cost Recovery System (MACRS). This system uses the straight-line method, meaning the same amount is deducted each year.

Nonresidential Real Property

Depreciated over 39 years under MACRS.

Qualified Improvement Property

Improvements made to the interior of nonresidential buildings after the building was first placed in service. These are generally depreciated over 15 years under MACRS.

To depreciate a property, it must:

• Be owned by you, even if subject to a debt.
• Be used in a business or income-producing activity.
• Have a determinable useful life and be expected to last more than one year.
• Not be placed in service and disposed of in the same year.