Yes, you can depreciate a rental property, which allows you to deduct the cost of the building (not the land) over its useful life as wear and tear, providing a significant tax benefit by reducing your taxable rental income. Residential rental property is typically depreciated over 27.5 years using the General Depreciation System (GDS) under the Modified Accelerated Cost Recovery System (MACRS). You must own the property, use it to generate income, and report it on IRS Form 4562.
Instead, the IRS lets you claim a portion of the building's value each year as it ages. For residential rentals, the IRS sets the useful life at 27.5 years under the General Depreciation System (GDS). That means you can spread out deductions evenly over nearly three decades.
Capital works deduction, also known as 'building allowance', refers to the depreciation of the building structure and its fixed assets, such as walls, roofs, and plumbing. Investors can claim tax deductions for capital works over a period of 40 years at a rate of 2.5% per year.
This reduces your overall tax bill. There's also another tax deduction available for landlords and investors – the deduction for depreciation on rental property. However, while day-to-day rental expenses are deducted in the year you spend the money, depreciation deductions are taken over several years.
In the realm of real estate investment, the 80/20 rule, or Pareto Principle, is a potent tool for maximizing returns. It posits that a small fraction of actions—typically around 20%—drives a disproportionately large portion of results, often around 80%.
The "6-year rule" for investment property, primarily an Australian tax concept (ATO), lets you rent out your former main home for up to six years while still potentially claiming the main residence exemption (CGT-free) on it, provided you lived there first, don't claim another property as your main residence for that period, and either move back in or sell within the timeframe. The clock resets if you move back in for a significant time (e.g., 6+ months) and then rent it out again, but you can only have one main residence exemption at a time.
So, instead of eliminating the tax liability, skipping depreciation may actually increase your overall tax liability. By not reporting depreciation, you're missing out on a significant tax deduction each year and may eventually end up paying recapture tax on a deduction you never claimed.
Misclassification, incorrect recovery periods, and improper use of Section 179/bonus depreciation are common errors. Proper documentation and adherence to IRS guidance and industry-specific matrices are essential to avoid audit issues.
If you have a gain from the sale or other disposition of Section 1245 property, all depreciation deductions previously taken for the property, or allowed if not actually taken, are recaptured and taxed as ordinary income.
But if you own rental property, there's a gem in the U.S. tax code you don't want to overlook: the $25,000 passive loss allowance. It's a special rule that allows small-time real estate investors to deduct up to $25,000 in passive losses against their non-passive income, like wages or business income.
Always remember tax depreciation is a cash flow tool, and the tax deduction up front enables investors to get ahead (by leveraging on the cash flow), despite having to pay back 50% only when the property is eventually sold, if sold at all.
Expensing an item may bring in more money in the short term, but once you have expensed it, it does not qualify for write-offs on future tax returns. Depreciating an asset may result in less money upfront, but could result in fewer taxes owed in the future.
The IRS allows taxpayers to deduct up to $3,000 of realized investment losses ($1,500 if married filing separately) against ordinary income each year. This deduction applies only to losses in taxable investment accounts and must be realized by December 31st to count for that tax year.
The Safe Harbor election for rental real estate under Revenue Procedure 2019-38 allows eligible taxpayers to treat their rental activity as a qualified trade or business for purposes of claiming the Qualified Business Income (QBI) deduction under Section 199A.
One of the downsides of rental property depreciation is the recapture tax. When you sell a depreciated property, you may be subject to a recapture tax on the depreciation deductions you previously claimed. This tax can be substantial and should be factored into your long-term investment strategy.
Yes. The One Big Beautiful Bill Act (OBBBA), signed into law in May 2025, has restored 100% bonus depreciation retroactively for property placed in service after December 31, 2024, and extends this full deduction through December 31, 2029.
Lower your taxable income with depreciation
As a landlord, you're eligible to take depreciation to deduct rental property and improvement costs. This depreciation applies only to the building's value, not the land. You can only depreciate a rental property if it meets IRS requirements: You own the property.
After two years, you can then sell your rental property and avoid paying capital gains tax on most, if not all, of the profit from that sale as well.
On a $100,000 capital gain, you'll likely pay 15% for long-term gains, resulting in about $15,000 in federal tax (plus potential state tax), but it could be 0% or 20% depending on your total taxable income and filing status, while short-term gains are taxed as ordinary income (potentially 22-24%).
Capital Gains Tax (CGT) is paid to HMRC on the sale of an asset that has made a profit. So, if you have a second home that you are looking to sell, how can you avoid CGT? Well, in truth you can't avoid paying CGT if the property has increased in value. But with expert help, you may be able to lower your final CGT bill.