How this calculation works
The Rental Property Depreciation Calculator computes annual IRS straight-line MACRS depreciation deductions, building basis, and annual income tax savings for real estate investors under IRS Publication 527.
Mathematical formula and logic
Depreciable Basis = Purchase Price × (1 - Land Value % / 100). Annual Depreciation = Depreciable Basis / Recovery Period (27.5 yrs residential or 39 yrs commercial). Annual Tax Savings = Annual Depreciation × Tax Bracket.
Worked example
A $450,000 residential rental with 20% land value ($90,000) has a $360,000 depreciable building basis. Annual IRS depreciation deduction is $360,000 / 27.5 = $13,090.91/year, generating $4,189.09 in annual tax savings in the 32% bracket.
Calculation assumptions
- IRS Publication 527 straight-line MACRS method (27.5 years residential, 39 years commercial).
- Land is non-depreciable and excluded from basis.
Frequently asked questions
Why is real estate depreciation called a 'phantom expense'?
Depreciation is a paper deduction allowed by the IRS that offsets taxable rental income without requiring any cash outflow, allowing investors to receive positive cash flow tax-free.
What is depreciation recapture tax upon selling?
When you sell a depreciated rental property, the IRS recaptures all cumulative depreciation taken (or that could have been taken) at a flat 25% tax rate, unless deferred via a 1031 Exchange.
How is land value determined for depreciation?
Land value is determined using the county tax assessor's property valuation ratio or an independent certified real estate appraisal (typically 15% to 25% of total purchase price).
What is Cost Segregation in real estate depreciation?
Cost segregation is a detailed engineering study that accelerates depreciation on 5-year, 7-year, and 15-year components (appliances, carpeting, landscaping) via bonus depreciation in year one.
Can I choose not to take depreciation to avoid recapture?
No! The IRS applies depreciation recapture tax on all depreciation 'allowed or allowable', meaning you will be taxed upon sale whether you claimed the deduction on your tax return or not.