Depreciation lets you deduct a slice of your building's cost every year — with no cash leaving your pocket. It's the reason a rental can put real money in your account while showing a tax loss, and it's the single biggest tax advantage of owning income property. It also comes with a bill at the end that surprises people who ignored it. (This is orientation, not advice — a CPA should run your numbers.)
The mechanics
Residential rental buildings depreciate over 27.5 years, straight-line. Only the structure depreciates — land doesn't — so you split your purchase price using the assessor's land/building ratio or an appraisal. A $330,000 purchase with $80,000 of land value gives a $250,000 depreciable basis: about $9,091/year of deduction. Capital improvements (roof, renovation) add to basis and depreciate on their own schedules.
What it does to your taxes
Depreciation stacks on top of your cash expenses. A property with $21,000 of rent and $13,000 of real costs made $8,000 — but after a $9,091 depreciation deduction, it reports a $1,091 tax LOSS while $8,000 sits in your bank account. Whether that paper loss offsets your other income depends on the passive-activity rules, but at minimum it shelters the rental income itself.
Recapture: the deferred bill
Depreciation isn't free money; it's deferred tax. When you sell, the depreciation you took (or could have taken — the IRS assumes it either way, so never skip claiming it) is "recaptured" and taxed, currently up to 25%, separate from capital gains on appreciation. The planning consequences: hold long enough for the deferral to compound, use a 1031 exchange to keep deferring, or — under current law — hold until death, when heirs receive a stepped-up basis. Each path is CPA territory.
Worked example
You buy a rental for $330,000 ($250,000 building). Over 10 years you deduct about $90,900 of depreciation, sheltering roughly that much income — worth around $21,800 in deferred tax at a 24% bracket. You sell for $420,000: the $90,900 of recapture is taxed at up to 25% (≈ $22,700), and the appreciation is taxed as capital gain. The decade of tax-free use of that money — and the option to 1031 past the bill entirely — is where the value lived.
When this rule of thumb breaks
Depreciation's value depends on your bracket and on whether passive-loss rules let you use the losses now or bank them. The land/building split is an estimate the IRS can challenge — document your method. Recapture math changes if Congress changes it. And for high-income owners with big paper losses locked up, the deduction is real but deferred twice over. None of this is a reason to skip depreciation — it's a reason to have a CPA who owns rentals themselves.