Rental Property Depreciation Calculator: Deduction, Mid-Month Convention, and Recapture

Introduction

Depreciation is the largest deduction most rental owners take and the one most often calculated wrong — usually in the first year, and usually by ignoring what happens at the end.

TL;DR: Divide the building basis (not the purchase price) by 27.5 years. Year one is prorated by the mid-month convention, so a September purchase earns 3.5 months of deduction rather than four or twelve. And the deduction is deferral, not forgiveness — accumulated depreciation returns at sale as unrecaptured section 1250 gain, taxed at up to 25%.

Land is not depreciable, and the split is yours to defend

You depreciate the building. You never depreciate the land, and the allocation between them is the first decision that changes the answer.

On a $350,000 purchase with a 20% land allocation, the depreciable building basis is $280,000. Move the allocation to 15% and the basis rises to $297,500, adding about $636 a year of deduction. Move it to 30% and the basis falls to $245,000.

The temptation to push land down is obvious, which is exactly why the split is the number an examiner reaches for first. The defensible sources, roughly in order of strength: a cost segregation study, an appraisal that separates the components, or the county assessor's land-to-improvement ratio applied to your purchase price. The last one is free, on record, and adequate for most owners.

building basis = (purchase price + capital improvements) × (1 − land %)
annual deduction = building basis ÷ 27.5

The mid-month convention, which most calculators skip

Residential rental property uses a mid-month convention. Whatever month the property is placed in service, the IRS treats it as placed in service on the 15th — so you get half that month plus every month after.

A property placed in service in January earns 11.5 months of a full year's deduction. One placed in service in December earns 0.5 months. Not one month, and certainly not a full year.

"Placed in service" also does not mean the day you closed. It means the day the property was ready and available to rent. A property bought in March and renovated until July is placed in service in July.

A worked example

A $350,000 residential rental, 20% land, placed in service in January, held ten years, owner at a 32% marginal rate.

Line	Amount
Total basis	$350,000
Land (not depreciable)	$70,000
Depreciable building basis	$280,000
Annual deduction	$10,182
Year-one deduction (11.5 months)	$9,758
Annual tax deferred at 32%	$3,258
Accumulated over 10 years	$101,394
Recapture due at sale (25%)	$25,348
Net of recapture	$7,098

Ten years of depreciation shelters $101,394 of income, worth $32,446 at a 32% marginal rate. At sale, $25,348 of that comes back. The net benefit is $7,098 — plus the time value of having deferred the rest for up to a decade, which is the real prize and is not shown in the table.

Recapture is the half of the transaction nobody shows you

Depreciation reduces your basis. A lower basis means a larger gain when you sell, and the portion of that gain attributable to depreciation is taxed as unrecaptured section 1250 gain at a rate capped at 25% — not at your long-term capital gains rate.

Two consequences follow, and they point in opposite directions.

If your marginal rate is above 25%, depreciation is a genuine arbitrage. You deduct at 32% or 37% and repay at 25%. The spread is real money, and it is larger the higher your bracket.

If your marginal rate is below 25%, the arithmetic can invert. Deducting at 22% and repaying at 25% is a loss on the rate, offset only by the deferral. It still usually wins over a long hold because deferral has value, but it is not the free lunch it is often described as.

Note also that you cannot opt out. Recapture is computed on depreciation "allowed or allowable" — if you were entitled to take it and did not, you are still taxed as though you had. Skipping depreciation does not avoid recapture; it simply forfeits the deduction.

What defers the recapture

A 1031 exchange rolls both the deferred gain and the accumulated depreciation into the replacement property rather than settling them. Held long enough and exchanged repeatedly, the liability can be deferred indefinitely, and heirs receive a stepped-up basis. The 1031 exchange calculator models what is being deferred.

If you want the deduction sooner rather than larger, a cost segregation study reclassifies parts of the building into 5-, 7- and 15-year lives, pulling deductions forward. That is a different question — whether to pay for a study — and the cost segregation calculator answers it directly.

Where this calculator is deliberately simple

It computes straight-line depreciation on the building only. It does not model land improvements on a 15-year life, personal property on a 5-year life, bonus depreciation, or section 179 — all of which are what a cost segregation study exists to identify.

It does not apply passive activity loss limitations. If your income exceeds the phase-out and you are not a real estate professional, the deduction may be suspended rather than usable this year, which changes when the benefit arrives but not its size.

It assumes the property is held for the full period entered and sold at the end. It is a model, not tax advice, and the land allocation in particular is a question to put to your CPA before you file rather than after.

FAQ

How do I calculate depreciation on a rental property?

Take the purchase price plus capital improvements, subtract the land value, and divide the remainder by 27.5 for residential rental property or 39 for commercial. That is your annual deduction. Year one is prorated by the mid-month convention based on the month the property was placed in service.

What is the mid-month convention?

The IRS treats residential rental property as placed in service at the midpoint of the month it actually was, regardless of the day. A property available to rent from 2 September is treated as placed in service on 15 September, earning 3.5 months of deduction in year one rather than four.

How much of the purchase price is land?

There is no standard figure — it varies from under 10% in low-land-value markets to over 40% in expensive coastal ones. The most commonly used and most defensible source is the county assessor's land-to-improvement ratio, applied to what you actually paid.

Do I have to take depreciation?

Effectively yes. Recapture at sale is calculated on depreciation "allowed or allowable", so declining to claim it does not reduce your tax at sale — it only forfeits the annual deduction. There is no upside to skipping it.

What is depreciation recapture and how much is it?

It is the tax on the gain attributable to depreciation you claimed. For residential rental property it is unrecaptured section 1250 gain, taxed at your ordinary rate but capped at 25%. On $100,000 of accumulated depreciation, that is up to $25,000 at sale.

Can I avoid depreciation recapture?

You can defer it with a 1031 exchange, which carries the accumulated depreciation into the replacement property. Held until death, the basis steps up for heirs and the liability disappears. Short of those, recapture is settled when you sell.

Conclusion

Get the land allocation from a source you could show an examiner, use the real placed-in-service month rather than the closing date, and look at the net-of-recapture figure rather than the annual deduction alone. Depreciation is one of the best features of owning rental property — it is simply a loan from the Treasury rather than a gift, and it is worth knowing the repayment terms.