Definition
The IRS allows real estate investors to depreciate buildings (not land) over their useful life, creating a non-cash tax deduction. Residential rental properties depreciate over 27.5 years; commercial over 39 years. Cost segregation studies can accelerate depreciation by reclassifying building components. Depreciation reduces taxable income even when the property is actually appreciating—a powerful tax advantage unique to real estate.
functions Formula
Annual Depreciation = (Building Cost − Land Value) / Useful Life
lightbulb Example
A $500K rental property (building $400K, land $100K). Annual depreciation = $400K / 27.5 = $14,545. At 24% tax bracket, this saves $3,491 annually in taxes—a "phantom deduction" since no cash was spent.
verified_user Key Points
- Buildings depreciate; land does not
- Residential: 27.5 years; commercial: 39 years
- Cost segregation accelerates deductions
- Creates tax losses even while property appreciates