Property Depreciation Calculator

How Property Depreciation Works Under IRS MACRS

The IRS allows real estate investors to deduct the cost of a building — but not land — over its useful life through a process called depreciation. Under the Modified Accelerated Cost Recovery System (MACRS), residential rental properties depreciate over 27.5 years and commercial properties over 39 years, using the straight-line method. This means the same deduction applies each year for the life of the property.

The depreciable basis is the foundation of the calculation. It equals the purchase price minus the land value, plus the cost of any capital improvements made after purchase. Because land does not wear out, it must always be excluded. A common approach is to use your county assessor's land-to-improvement ratio from your property tax bill to allocate the purchase price between land and structure. According to IRS Publication 946, you can also use an appraisal or any other reasonable method.

The Mid-Month Convention and First-Year Partial Deduction

For real property, the IRS requires the mid-month convention: regardless of the day within the month that property is placed in service, it is treated as placed in service on the 15th of that month. This reduces your first-year deduction based on how many months remain in the tax year after placement.

The formula for first-year depreciation is: (Annual Depreciation) × (Months Remaining in Year + 0.5) / 12. A property placed in service in January receives 11.5/12 of the full annual deduction in year one, while a December purchase receives only 0.5/12. This is why timing your property purchase can have a meaningful impact on your first-year tax deduction.

Capital improvements made after the original purchase are depreciated separately — they start a new depreciation schedule from the date placed in service. This calculator adds improvements to the original basis for a simplified combined view, but a qualified tax advisor can track each improvement separately.

Depreciation Recapture — Plan for It Before You Sell

One of the most overlooked aspects of rental property depreciation is depreciation recapture under IRS Section 1250. When you sell a depreciated property, the IRS "recaptures" the deductions you claimed at a maximum rate of 25% — higher than the standard long-term capital gains rate of 15-20%. For example, if you own a residential property for 10 years and claim $10,000 per year in depreciation, you would have $100,000 of accumulated depreciation subject to recapture upon sale.

Strategies to mitigate recapture include a 1031 exchange (defer all gain and recapture by rolling into a like-kind property), holding until death (heirs receive a stepped-up basis eliminating accumulated depreciation), or installment sales. Despite the recapture risk, most CPAs agree that taking depreciation is still mathematically beneficial because of the time value of money — a tax deduction today is worth more than a future tax liability at the same rate. Last updated: May 2026 based on IRS Publication 946 rates.

Using This Calculator for Tax Planning

This tool uses IRS MACRS straight-line depreciation rates as published in IRS Publication 946 and Form 4562 instructions. The tax savings table shows your estimated annual and lifetime savings at four federal brackets (22%, 24%, 32%, 37%). Your actual savings depend on your total taxable income, state taxes, passive activity rules, and whether you qualify as a real estate professional for unlimited deduction purposes.

The IRS limits passive activity losses — rental depreciation that creates a loss can generally only offset other passive income, unless your income is below $100,000 (partial allowance up to $25,000) or you qualify as a real estate professional. Consult a CPA or enrolled agent for your specific situation before filing Form 4562.