Depreciation (Real Estate)

Real Estate

Real estate depreciation is the systematic deduction of building cost over IRS-prescribed useful life: 27.5 years for residential rental property, 39 years for commercial. Only the building depreciates (not land). A $300,000 rental ($60,000 land + $240,000 building) generates $8,727 annual depreciation deduction — non-cash expense that reduces taxable income. Combined with mortgage interest and operating expenses, depreciation often creates 'paper losses' that shelter rental income. Recapture: when property sells, accumulated depreciation is recaptured at up to 25% — a deferred (not eliminated) tax. 1031 exchanges defer both gain and depreciation recapture indefinitely.