Tax Depreciation and Cost Segregation for Rental Property
How Seayora depreciates each kind of rental property — 27.5 and 39 years, 5, 7 and 15 years — bonus depreciation by purchase date, catching up missed depreciation on Form 3115, and what a sale recaptures.
You depreciate the building and the improvements you make to it, never the land under it. The register holds each building, improvement and item of property with its cost, the land value inside it and the day it was placed in service — the day it was ready and available to rent. Seayora works out every year by the method the law gives that kind of property (26 U.S.C. § 167, 26 U.S.C. § 168, IRS Publication 946, IRS Publication 527).
Kinds of property and their lives
| Kind of property | Life | Method and convention | Notes |
|---|---|---|---|
| Residential rental building | 27.5 years | SL, MM | The building itself — not the land. 27.5 years, straight line, mid-month. |
| Commercial building | 39 years | SL, MM | An office, store or other nonresidential building. 39 years, straight line, mid-month. |
| Land improvements | 15 years | 150DB, HY | Paving, fences, landscaping, outdoor lighting, a parking lot. 15 years. |
| Qualified improvement property | 15 years | SL, HY | Interior work on a commercial building after it was first placed in service. 15 years, straight line. |
| Appliances, carpet and furniture | 5 years | 200DB, HY | Personal property used in a residential rental. 5 years. |
| Equipment and furniture (7-year) | 7 years | 200DB, HY | Office furniture and equipment, and most commercial fixtures. 7 years. |
| Land | Not depreciated | — | Never depreciated. Recorded so a sale works out the gain on the whole property. |
A building is straight line with the mid-month convention: the first year counts from the middle of the month it went into service. Shorter-lived property uses declining balance with the half-year convention, switching to straight line when that gives more. Seayora computes from the method rather than the IRS’s rounded percentage tables in IRS Publication 946, so a preparer using the tables can differ by a few dollars a year.
Bonus depreciation
Property with a life of 20 years or less can take bonus depreciation in the year it goes into service. For property acquired after January 19, 2025 it is 100%, permanently (IRC §168(k)(1), (k)(2)(A)(i), (k)(6) as amended by P.L. 119-21 §70301. — Public Law 119-21 (H.R. 1, 119th Congress), 26 U.S.C. § 168). The PURCHASE date decides which rule applies — property bought earlier is on the older phase-down by the year it is placed in service:
| Placed in service | Bonus for property acquired before January 20, 2025 |
|---|---|
| 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
You can elect out for a class of property, which Seayora models with "Elect out" on the asset. A 27.5- or 39-year building never takes bonus. Most states do not follow bonus depreciation — see State and local tax rules for what is added back.
Cost segregation
A cost segregation study separates the parts of a building that are really 5-year property (appliances, carpet, some fixtures) and 15-year land improvements (paving, landscaping, fences). Those parts take bonus depreciation. Enter the study’s percentages on the building and the register splits it into three. The IRS explains how it examines a study in its Cost Segregation Audit Techniques Guide. Before there is a study, Seayora sizes the question with an illustrative split (12% five-year and 8% fifteen-year) and labels it every time — only a study decides.
Depreciation you never claimed
If you claimed less than was allowable in earlier years, the difference is not lost: an automatic change in accounting method on Form 3115 takes it all in the year of change as a §481(a) adjustment (IRC §446(e), §481(a); Treas. Reg. §1.446-1(e)(2)(ii)(d); Rev. Proc. 2015-13 — 26 U.S.C. § 446, 26 U.S.C. § 481, Treas. Reg. § 1.446-1, Rev. Proc. 2015-13). Enter "Depreciation actually claimed in earlier years" on the asset and the plan measures it. A sale reduces basis by what was allowable whether or not you claimed it, which is why catching up matters.
When you sell
The plan splits a gain the way the return does (IRC §1245, §1250, §1(h)(1)(E), §1231, §1016(a)(2) — 26 U.S.C. § 1245, 26 U.S.C. § 1250, 26 U.S.C. § 1, 26 U.S.C. § 1231, 26 U.S.C. § 1016):
- Depreciation on personal property and land improvements — the parts a study separated — is recaptured as ordinary income, up to the gain.
- Straight-line depreciation on the building is unrecaptured §1250 gain, taxed at no more than 25%.
- The rest is a long-term §1231 gain. A §1231 loss is ordinary.
- A like-kind exchange defers all of it (26 U.S.C. § 1031, Treas. Reg. § 1.1031(k)-1); an installment sale spreads it (26 U.S.C. § 453, IRS Form 6252).
Repairs and improvements
A repair is deducted; an improvement is depreciated. The de minimis safe harbor ($2,500 an item without an applicable financial statement) and the safe harbor for small taxpayers let small improvements be deducted at once (Treas. Reg. §1.263(a)-1(f), §1.263(a)-3(h), (i) — Treas. Reg. § 1.263(a)-1, Treas. Reg. § 1.263(a)-3). Both are elections made on a timely filed return.
The convention when most property goes into service late in the year
If more than 40% of the shorter-lived property you place in service in a year goes into service in the last three months, the mid-quarter convention replaces half-year for that year’s property (IRC §168(d)(3); Treas. Reg. §1.168(d)-1 — 26 U.S.C. § 168, Treas. Reg. § 1.168(d)-1). The test counts everything you placed in service that year — not only these rentals — so Seayora warns when the register meets it rather than changing the numbers by itself. It only matters for property not fully expensed by bonus.
Related guides
- Tax Planning for Owners, Trusts and REITs: Lower the Tax on Your Rentals
- Rental Losses, Real Estate Professionals and Short-Term Rentals
- Trusts and Estates That Own Rental Property: Form 1041 and Distributions
- REIT Qualification Tests, Distributions and Form 1099-DIV
- State and Local Tax Rules for Rental Owners: Bonus Add-Backs, Nonresident Returns, PTET and Transfer Taxes
- Every Law the Tax Planner Cites, With Links
Related features and guides
- Tax Planning for Owners, Trusts and REITs: Lower the Tax on Your Rentals — Documentation. Every lawful way to lower the federal tax on your rentals, measured against your own records — plus tax depreciation and cost segregation, trusts’ Form 1041 and distributions, REIT qualification tests, and the state and city rules where you live and own.
- Rental Losses, Real Estate Professionals and Short-Term Rentals — Documentation. When a rental loss offsets your other income: the $25,000 allowance and its phase-out, real estate professional status, the short-term rental rule, the seven material participation tests and the 3.8% net investment income tax.
- Trusts and Estates That Own Rental Property: Form 1041 and Distributions — Documentation. How a trust or estate holding rentals is taxed — grantor and non-grantor trusts, compressed brackets, distributable net income, the distribution that costs the family least, the 65-day election and the filing deadlines.
- Depreciation on a Rental Property: What Small Landlords Miss — Guide. A rental building depreciates over 27.5 years, but appliances, carpet and paving can use 5- and 15-year lives and bonus depreciation. How it works.
- 1031 Exchanges for Rental Property: The 45-Day and 180-Day Rules — Guide. How a 1031 like-kind exchange defers tax on selling a rental: real property only since 2018, the 45-day and 180-day deadlines, boot and related parties.
- Bills & Accounts Payable — Feature. Enter and track bills, manage vendor payables, and tie each cost back to the property, unit, or job that generated it.