What Landlords Need to Know About Depreciation and Property Value

Key Takeaways

• As a real estate investor, depreciation is one of the most powerful tools you can leverage.
• It’s important to fully understand the power of depreciation in order to maximize your success as an investor.
• Partnering with a property management company can help improve your finances and simplify the management process.

Depreciation remains one of the most powerful yet least understood advantages in real estate investing. Many property owners view it as an accounting concept, but in practice, it’s a financial lever that can quietly transform profitability.

For landlords, depreciation turns the natural aging of a building into a tax benefit. The IRS recognizes that every property experiences wear and tear over time, allowing you to deduct part of that “loss in value” each year. When applied strategically, these deductions can reduce taxable income, strengthen cash flow, and steadily build long-term wealth. Continue reading this guide by Campus Connection Property Management to learn more.

What Is Depreciation and Why It Matters

Depreciation represents the gradual decline in a property’s value caused by age, use, and natural deterioration. Even if your property appreciates in the open market, the IRS still recognizes that materials like roofs, walls, and systems eventually wear out. This is why investors can deduct the building’s value, though not the land, over a fixed timeline.

How Depreciation Works

The IRS categorizes real estate as a long-term capital asset. Residential rental properties can be depreciated over 27.5 years, while commercial buildings use a 39-year schedule. That means each year, you can deduct a portion of your property’s cost basis, the purchase price minus land value, as a non-cash expense.

For example, if the building portion of your property is valued at $275,000, you can deduct $10,000 annually ($275,000 ÷ 27.5 years). This deduction continues until you sell or retire the property from rental service.

You can also add the cost of capital improvements, such as a new roof, HVAC replacement, or room addition, to your depreciable basis. Routine maintenance, however, must be expensed in the year it’s incurred.

Calculating Your Annual Depreciation

• Determine the property’s cost basis. Start with the total purchase price. This figure forms the foundation of your depreciation schedule.
• Subtract the land value. Only the building and improvements depreciate. Land never loses value, so it must be excluded from calculations.
• Divide by 27.5 (residential) or 39 (commercial). This gives you your annual deduction. The result is the amount you can claim each year to reduce taxable income.

To maximize accuracy, many investors rely on appraisers or CPAs to allocate the proper ratio between land and structure. Overestimating can lead to IRS issues later.

The Tax Advantage and Its Catch

Depreciation is unique because it allows you to lower taxable income without spending additional cash. It can move a rental from break-even to profitable on paper. But there’s a catch: the IRS eventually “recaptures” some of this tax benefit when you sell.

Understanding Depreciation Recapture

When a property sells for more than its adjusted cost basis (the original value minus total depreciation), the IRS collects a recapture tax on the depreciation you’ve claimed. This is typically taxed at up to 25%, depending on your income level.

Suppose you’ve claimed $50,000 in depreciation over several years. When you sell, you may owe up to $12,500 in recapture tax unless you use a strategy to defer it.

Deferring Taxes with a 1031 Exchange

A 1031 Exchange, named after Section 1031 of the Internal Revenue Code, allows you to sell one investment property and reinvest the proceeds into another “like-kind” property, without paying taxes immediately.

To qualify:

• The new property must be of equal or greater value.
• It must be used for investment or business purposes.
• You must identify replacement properties within 45 days and close within 180 days.

This strategy effectively postpones both capital gains and depreciation recapture taxes, helping investors keep more capital working toward future growth. Many seasoned landlords repeat this process to build wealth across multiple properties without triggering taxable events.

Who Qualifies for Depreciation

To claim depreciation, you must:

• Legally own the property.
• Use it primarily for income generation.
• Expect it to have a useful life longer than one year.
• Hold it for rental, not for short-term resale.

Depreciation begins the year your property is placed into service, when it’s available for rent, not when it’s first occupied.

Avoiding Common Depreciation Mistakes

Even seasoned investors can make costly missteps. Here are key points to remember:

• Don’t depreciate land. Land never wears out.
• Separate improvements from repairs. Painting is an expense; replacing the roof adds to your depreciation base.
• Keep detailed records. Track improvements, service dates, and invoices to support deductions.
• Plan for recapture. Understand your exit strategy before selling to avoid surprises.

Why Depreciation Should Be in Every Landlord’s Toolkit

When paired with smart financing and long-term ownership, depreciation turns real estate into one of the most tax-efficient assets available. It cushions cash flow, reduces taxable income, and provides a steady benefit even in years of flat rental growth. For portfolio-minded investors, it’s not just an accounting line, it’s a compounding advantage that rewards patience.

Bottom Line

Depreciation allows landlords to recover the cost of property wear and tear while keeping taxable income low. Used wisely, it transforms short-term savings into long-term financial leverage. However, it must be calculated correctly and managed strategically to avoid issues during sale or audit.

At Campus Connection Property Management, we help investors manage and protect their assets with precision, from rental operations to tax optimization. Our team collaborates with trusted accountants and legal professionals to ensure your properties stay compliant, profitable, and positioned for growth.

Whether you’re managing a single-family rental or a growing portfolio, we’ll help you make informed financial decisions that align with your investment goals. Contact us today to learn how professional property management can simplify ownership, protect your profits, and help you unlock the full power of depreciation.