Topic 01 · 6 min read

Depreciation and Cost Recovery

A deduction you take without spending a dollar.

Buildings wear out. Tax law accepts that by letting an owner deduct a slice of the building's cost every year, even in a year when nothing broke and no check was written. Land never wears out, so land is never depreciated — only the structure and the things inside it.

What to know

Residential rental property

A house, duplex, or apartment building rented to tenants is written off over 27.5 years. Divide the building's value (not the land) by 27.5 and that is roughly the yearly deduction.

Commercial property

Offices, retail centers, and warehouses stretch over 39 years, so the yearly deduction is smaller but the properties are often much larger.

Shorter-life pieces

Carpet, appliances, cabinets, landscaping, and specialty wiring can carry 5, 7, or 15-year lives instead. Separating them out is what a cost segregation study does.

Bonus depreciation

In years Congress allows it, a large share of those short-life items can be deducted immediately rather than spread out.

Recapture at the sale

Depreciation lowers your basis. When the property sells, the deductions you already took are generally taxed back at up to 25%. The benefit is timing, not free money.

Watch out for

• Only the building depreciates — allocate land value honestly and document how you did it.
• Depreciation is not optional. If you skip it, the IRS still reduces your basis as if you had taken it.
• Plan for recapture before you sell, not after.