Real Estate Depreciation Calculator
Calculates the IRS straight-line depreciation deduction for residential (27.5-year) and commercial (39-year) investment properties, prorated for the month first placed in service. Use it when preparing tax returns or forecasting deductions.
About this calculator
The IRS requires investment property owners to recover the cost of a building — but not land — over a fixed recovery period using straight-line depreciation. The depreciable basis is: Depreciable Value = Property Purchase Price − Land Value + Capital Improvements. The annual depreciation rate is 1/27.5 for residential rental property and 1/39 for commercial property, per IRS Publication 946. Because the IRS uses a mid-month convention, the first year is prorated: First-Year Deduction = (Depreciable Value / Recovery Years) × (Months Remaining in Year / 12), where months remaining = 13 − month placed in service. In subsequent full years, the deduction is simply Depreciable Value / Recovery Years. This non-cash deduction reduces taxable income without requiring an actual cash outlay, making it a powerful tax benefit of real estate ownership.
How to use
You purchase a residential rental property for $350,000. The land is appraised at $75,000 and you add $20,000 in capital improvements. You place the property in service in March (month 3). Depreciable value = $350,000 − $75,000 + $20,000 = $295,000. Recovery period = 27.5 years (residential). Full-year depreciation = $295,000 / 27.5 = $10,727/year. Months remaining in first year = 13 − 3 = 10 months. First-year deduction = $10,727 × (10/12) = $8,939. In years 2 through 27, you deduct $10,727 per year.
Frequently asked questions
Why is land excluded from real estate depreciation calculations?
The IRS does not allow depreciation on land because land does not wear out, decay, or become obsolete — it has an indefinite useful life. Only the physical structure (building, improvements) depreciates over time. When you purchase real estate, you must allocate the purchase price between land and building using an appraisal, property tax assessment, or comparable sales data. Overallocating value to the building to maximize depreciation deductions is a common audit red flag. The IRS may challenge allocations that appear inconsistent with market values or local assessment records.
What is the difference between 27.5-year and 39-year depreciation for real estate?
Residential rental properties — defined as those deriving 80% or more of gross rents from dwelling units — are depreciated over 27.5 years. Commercial real estate, including office buildings, retail centers, warehouses, and mixed-use properties that don't meet the residential threshold, is depreciated over 39 years. A shorter recovery period means a larger annual deduction, making residential rentals slightly more tax-advantaged on a per-dollar basis. The recovery period begins the month the property is placed in service and ends when the full depreciable basis has been recovered or the property is sold.
How does the mid-month convention affect the first-year depreciation deduction?
Under the IRS mid-month convention, a property placed in service at any point during a month is treated as if it were placed in service at the mid-point of that month. This means you receive half a month's depreciation for the month of acquisition regardless of the actual date. The formula accounts for this by calculating months remaining as 13 minus the month placed in service. A property placed in service in January (month 1) gets 12.5 months in year one, while one placed in service in December (month 12) gets just 0.5 months — significantly reducing the first-year deduction for late-year acquisitions.