Topic 03 · 6 min read
How Depreciation Works
Writing off a building a slice at a time.
Depreciation spreads the cost of the building across the years the law says it will last: 27.5 years for residential rental property and 39 for commercial. Each year you deduct roughly one of those slices against the rent, even though no money left your account. It is the reason a profitable rental can show a tax loss.
What to know
- Straight line, mostly
- Real estate uses equal annual amounts rather than front-loaded ones. The building's cost divided by 27.5 or 39 is the yearly figure.
- The clock starts at service, not purchase
- Depreciation begins when the property is ready and available to rent, and the first and last years are prorated by month.
- Residential versus commercial
- A duplex uses 27.5 years; an office suite or retail bay uses 39. Mixed-use buildings are judged by where the income comes from.
- Claimed or not, it counts
- The tax rules settle up at sale based on the depreciation you were allowed to take, so skipping it gains nothing.
The tax benefit
A deduction arrives every year without a matching cash outlay, sheltering rental income that would otherwise be taxed at ordinary rates.
Worked example
The yearly slice
A depreciable building basis of $324,800 divided by 27.5 years gives about $11,811 a year. Against $12,000 of net rental profit, the taxable result is nearly zero.
Watch out for
- Time the property is used personally does not qualify.
- Starting depreciation before the place is truly rent-ready overstates the early years.
- Missed depreciation usually needs a formal accounting-method correction, not a quick amendment.
Terms from this topic
Straight-line depreciationPlaced in serviceRecovery periodUseful life
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