A residential rental building is depreciated over 27.5 years using the straight line method and a mid-month convention (IRC § 168(c) and (d); IRS Pub 527, 2025). Only the building is depreciable, never the land, and depreciation starts when the property is ready and available for rent, not when the first tenant moves in. If you convert your former home to a rental, the depreciation basis is the lesser of its fair market value or its adjusted basis on the date of conversion.

The short version

  • Residential rental property has a 27.5-year recovery period under the general depreciation system (GDS).
  • Land is not depreciable. Split the purchase price between land and building by the ratio of fair market values, or by assessed values if you are not certain of the fair market values.
  • Basis generally includes the price plus certain settlement costs, such as legal and recording fees, title insurance and transfer taxes.
  • A home converted from personal use uses the lesser of fair market value or adjusted basis at conversion.
  • Improvements are depreciated as separate items, starting when each is placed in service.

How the 27.5-year rule works

Pub 527 defines residential rental property as a rental building or structure (including a mobile home) where 80% or more of the gross rental income for the tax year is from dwelling units. A unit in a hotel, motel or inn where more than half the units are used on a transient basis is excluded.

Three things set the deduction: basis, recovery period and method.

  • Recovery period. 27.5 years under GDS (§ 168(c)). The alternative depreciation system (ADS) uses 30 years (§ 168(g)(2)(C)(iii)). Electing ADS for a residential rental is made property by property in the first year it is placed in service, and Pub 527 says once you make it, "you can never revoke it."
  • Method. Straight line, required for residential rental property.
  • Convention. Mid-month: property placed in service or disposed of in any month is treated as placed in service or disposed of at the midpoint of that month (§ 168(d)(2) and (d)(4)(B)).

Pub 527's example: a $185,000 house (building $160,000, land $25,000) placed in service February 8 gets 3.182% of the building's basis for the first year, which is $5,091. Your own figure depends on your basis and month, so have your preparer run it.

Placed in service means ready and available for a specific use in the rental. In one Pub 527 example, a house ready for rent July 5, advertised in July and rented September 1 is placed in service in July. In another, a former home listed for rent October 1 and rented December 1 is placed in service October 1. Depreciation stops when you have fully recovered the basis or retire the property from service, whichever comes first.

What goes into basis

The basis of rental property is generally its adjusted basis when you place it in service.

Included in basis (purchase)Not included in basis
Abstract feesFire insurance premiums
Charges for installing utility servicesRent or occupancy charges before closing
Legal fees and recording feesCharges for getting or refinancing a loan
Surveys and transfer taxes
Title insurance
Amounts the seller owes that you agree to pay (back taxes or interest, recording or mortgage fees, improvement or repair charges, sales commissions)

Real estate taxes the seller owed that you pay and are not reimbursed for are added to basis, not deducted. For property you received by exchange, gift, from a spouse or by inheritance, Pub 527 sends you to Pub 551 for the basis rules. For inherited property, Pub 551 says basis is generally the fair market value at the date of death; see inheriting a rental property in California.

Separating the land. "You can't depreciate the cost of land because land generally doesn't wear out, become obsolete, or get used up." Clearing, grading, planting and landscaping costs are usually part of the land. Allocate the purchase price by the ratio of fair market values of land and building; if you are not certain of those values, the Schedule E instructions allow using the assessed values for real estate tax purposes.

Converting your home to a rental

When you change a home from personal use to rental use, Pub 527 says "the basis for depreciation will be the lesser of the FMV or adjusted basis on the date of conversion." In Pub 527's example, the adjusted basis of the house was $164,000 and its fair market value (excluding land) was $147,000, so the depreciation basis is $147,000.

Practical steps for a conversion:

  1. Find your adjusted basis as of the conversion date, with your closing statement and improvement records.
  2. Get a supportable fair market value of the building, excluding land, as of the conversion date.
  3. Use the lower figure as the depreciation basis.
  4. Record the date the home was ready and available for rent as the placed-in-service date.

Depreciation taken on a former home matters later. If you sell and claim the home sale exclusion, the part of the gain equal to depreciation after May 6, 1997 cannot be excluded. See selling a former home you rented out and, for service members, the military home sale exclusion suspension.

Improvements and other assets

Pub 527: "Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes." An improvement uses the recovery class that would apply to the original property if it had been placed in service at the same time, and its recovery begins when the improvement is placed in service (or when the property is, if later). Pub 527 lists "Additions and improvements, such as a new roof" with the building's recovery period.

Other assets in a rental have shorter classes (Pub 527, placed in service in 2025):

AssetClass
Appliances, carpeting and furniture used in a residential rental5-year
Computers and cars5-year
Office furniture and equipment7-year
Roads, fences and shrubbery (if depreciable)15-year
Structural components such as furnaces, water pipes, venting27.5-year

Some shorter-lived items may qualify for bonus depreciation. Whether a cost is an improvement at all is covered in repairs vs. improvements.

Allowed or allowable

Pub 527: "If you didn't claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted." That means skipping depreciation does not avoid its effect on a later sale. Pub 527 and Pub 946 describe the fixes: Form 1040-X where allowed, otherwise a change in accounting method (Form 3115). A tax professional handles that change.

California differences

California generally follows federal MACRS depreciation as of its January 1, 2025 conformity date, with modifications. The main ones for rental owners:

  • California does not allow bonus depreciation (R&TC 17250(a)(11)).
  • California's § 179 limit is $25,000, with phase-out starting at $200,000, for tax year 2025.
  • The FTB 3885A instructions note that the recovery periods or the basis used for California may differ from federal. A separate FTB 3885A is prepared for each activity with a difference.
  • Because of these differences, your California adjusted basis can differ from your federal basis, and so can the gain when you sell. Keep both depreciation schedules.
  • For property inherited on or after January 1, 1987, the California and federal basis are the same.

What to do next

  1. Gather the closing statement, the purchase contract and the assessor's land and improvement values.
  2. List improvements by date and cost, with receipts.
  3. Note the date the property was ready and available for rent.
  4. For a converted home, document the fair market value at conversion.
  5. Ask your CPA to set up federal and California depreciation schedules and to check for any depreciation you missed in past years.

Coronado owners can also read taxes on a Coronado rental. To see how depreciation fits next to rent and costs, try the rental cash flow calculator.

Frequently asked questions

When does depreciation start on a rental?

When the property is placed in service, meaning ready and available for rent, even if no tenant has moved in. In Pub 527's examples, a house ready and advertised in July but rented September 1 is placed in service in July, and the mid-month convention treats it as placed in service in the middle of that month.

What happens if I never claimed depreciation?

Your basis is still reduced by the depreciation that was allowable, so the effect shows up when you sell. Pub 527 and Pub 946 describe the fixes, an amended return where allowed or an accounting method change on Form 3115. A CPA or enrolled agent should handle it.

Is a new roof deducted or depreciated?

Pub 527 lists additions and improvements such as a new roof with the building's recovery period, so a roof replacement treated as an improvement is depreciated as a separate item over 27.5 years. Whether a particular roof job is an improvement or a repair depends on the capitalization rules in repairs vs. improvements.

Does an heir restart depreciation on an inherited rental?

The heir's basis is generally the fair market value at the date of death (Pub 551), and depreciation is based on the basis when the property is placed in service in the rental. How the recovery period applies to an heir should be confirmed with a tax professional. Coronado owners can see renting out an inherited Coronado home.

This is general information, not tax or legal advice. Tax rules change and depend on your facts; talk to a CPA or enrolled agent before acting.

McKee Properties manages rentals from its Coronado office; contact us with questions about your property.

Sources

Verified October 19, 2026.

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