Depreciation lets you deduct the cost of a rental building over time, even though you don't spend that money again each year. For a residential rental, the building is generally deducted over 27.5 years. It's one of the largest deductions a landlord has, and it only works if the books show what the property actually cost.
What gets depreciated
The building, not the land. Land doesn't wear out, so it isn't depreciated. The purchase price gets split between land and building, often using the property tax assessment, and only the building portion is depreciated.
Costs to buy the property. Many closing costs, like title fees, recording fees, and transfer taxes, are added to what the property cost rather than deducted right away.
Improvements. A new roof, an HVAC system, or a kitchen remodel is depreciated over its own schedule, starting when the work is finished and in use. Some items, like appliances and carpet, are depreciated over shorter periods than the building.
What doesn't
Repairs. Fixing a leak, patching drywall, or replacing a broken window is deducted in the year you pay for it. Small purchases can often be deducted right away too, under what's called the de minimis safe harbor, which covers items up to $2,500 each.
The line between a repair and an improvement isn't always obvious, and it changes how much you deduct this year. That's why each one needs to be recorded clearly when it happens.
When it starts
Depreciation starts when the property is ready and available to rent, not when you bought it and not when the first tenant moves in. For a property that needed work first, the rehab costs are added to the building's cost before depreciation begins.
What happens when you sell
The depreciation you deducted lowers the property's cost on paper. When you sell, part of the gain that comes from those deductions is taxed differently, at a rate that can be up to 25%. This is called depreciation recapture, and it applies whether or not you claimed the depreciation, so skipping it doesn't help.
What your books need to show
The purchase price, closing costs, and the land and building split
Every improvement, with its cost and the date it was finished
Repairs recorded separately from improvements
The date each property was ready to rent
Your CPA calculates the depreciation and decides how each item is treated. They can only do that from a clean list of what each property cost and what was spent on it.
Where to start
If you're not sure your depreciation records are complete, tell us where your books stand. We'll go through it on a short discovery call.
REVI Bookkeeping works with house flippers and long-term rental landlords anywhere in the US.
