Residential rental properties are depreciated over 27.5 years under IRS rules. Divide the property's depreciable basis (purchase price minus land value) by 27.5. That annual deduction reduces your taxable rental income, often to zero or below even on cash-flowing properties.
A $300,000 rental property with $250,000 depreciable basis (land = $50k) generates $9,090/year in depreciation deductions. If your property cash flows $12,000/year but depreciation is $9,090, your taxable income is only $2,910.
Cost segregation accelerates depreciation by identifying components that depreciate faster than the building — personal property (5 years), land improvements (15 years), and components (15 years). A cost seg study on a $500k property can front-load $80k–$150k in Year 1 deductions.
When you sell a rental property, the IRS recaptures the depreciation you claimed, taxing it at 25%. This is why buy-and-hold investors favor 1031 exchanges — defer the sale, defer the recapture, keep compounding.
Rental losses from depreciation are passive losses that can only offset passive income — unless you qualify as a real estate professional or meet the $25k active participation exception (for those with AGI under $100k).
Dan White is a licensed Virginia real estate agent at Pearson Smith Realty and founder of FreeDealCalc.com. He has been using depreciation strategies on rental properties across Northern Virginia for over 20 years.