Rental Property Depreciation Schedule: 27.5-Year Table with a Worked Example

A residential rental building is depreciated straight-line over 27.5 years: building basis divided by 27.5 for each full year, with the first and last years prorated by the month placed in service under the mid-month convention. Land is never depreciated.

The rules in short

Publication 527 puts residential rental property in the 27.5-year class under the General Depreciation System (MACRS GDS), using the straight-line method and a mid-month convention. The mid-month convention treats property placed in service in any month as placed in service at the midpoint of that month, so the first year gets half a month for the month you start plus every month after it. Publication 946 prints the resulting percentages in Table A-6. Depreciation starts when the property is placed in service, meaning ready and available for rent, which can be later than the closing date.

27.5-year table: first-year percentage by month

First-year % = (12 - m + 0.5) / 12 / 27.5, where m is the month placed in service (1 = January). Years 2 through 27 are 3.636% (1 / 27.5) of basis each. The percentages below are rounded to three decimals.

The remainder lands in year 28 for January through June, and in year 29 for July through December (a half month to 5.5 months in a trailing year). That last year simply takes whatever basis is left, so the total equals your basis exactly. Rounding to the cent in each year can shift the final amount by a few cents.

Worked example

You buy a rental for $300,000. The county assessor's records value the land at $60,000 and the improvements (the building) at $240,000, so the land is 20% and the building 80%. The assessor's ratio is one common way to split the price; a purchase appraisal or other reasonable method also works. Pub 527 tells you to figure the basis of the building separately from the land.

You also paid $6,000 of settlement costs that are added to basis (for example certain title, legal and recording fees; costs tied to the loan are treated differently, so check Pub 527's list). Allocate them the same way as the price: $6,000 x 240/300 = $4,800 to the building, $1,200 to the land.

• Building basis: $240,000 + $4,800 = $244,800 (land basis $61,200, not depreciated).
• Full-year amount: $244,800 / 27.5 = $8,901.82.
• Placed in service in May (m = 5): (12 - 5 + 0.5) / 12 = 7.5 / 12, or 2.273%. Year 1 = $8,901.82 x 7.5/12 = $5,563.64.
• Years 2-27: 26 years x $8,901.82 = $231,447.32.
• Through year 27: $5,563.64 + $231,447.32 = $237,010.96.
• Year 28 remainder: $244,800.00 - $237,010.96 = $7,789.04 (about 10.5 months' worth).

Check: $5,563.64 + $231,447.32 + $7,789.04 = $244,800.00, the full building basis. If the same building had been placed in service in October, the table gives 0.758% in year 1 and the remainder would fall in year 29.

Improvements, appliances and land improvements

Each improvement is its own asset with its own schedule: a 27.5-year schedule starting from the month that improvement is placed in service, not the month you bought the house. See repairs vs improvements to decide what gets capitalized. Per Pub 527, appliances, carpeting and furniture used in a residential rental activity are 5-year property, and land improvements such as fences and sidewalks are generally 15-year property (see Pub 946 for the classes and the tables for those lives). They use different tables from the 27.5-year one above.

Where it goes on your return

In the first year you place the property in service, you report depreciation on Form 4562, and the total carries to Schedule E, line 18 (depreciation expense or depletion). In later years you generally only file Form 4562 again if you place new property in service, but line 18 is still filled in every year from your schedule. Keep your own year-by-year schedule so each year's number is easy to find.

Depreciation and selling the property

When you sell, the depreciation you took (or were entitled to take) reduces your basis, which raises your gain. The portion of gain attributable to depreciation on real property is generally taxed as unrecaptured section 1250 gain at a maximum rate of 25%. The rule is "allowed or allowable": your basis is reduced by the depreciation you were entitled to claim even if you never claimed it. Skipping depreciation therefore does not avoid recapture. Pub 527 covers the sale of rental property; the details depend on your situation, so talk to a tax professional before selling.

FAQ

Related

• Rental Property Repairs vs Improvements: How to Log Each Cost
• Schedule E Line 19 Other Expenses: What Goes There and How to Track It
• Rental Property Tracker (Schedule E ready spreadsheet)

Disclaimer

For record-keeping only. This page is not tax, legal or accounting advice. Verify everything with the official IRS instructions or a tax professional. Kitebyte is not affiliated with the IRS.