Depreciation (Real Estate)

Depreciation is a tax deduction that allows real estate investors to recover the cost of an investment property over time — 27.5 years for residential and 39 years for commercial properties. Only the building value (not land) is depreciable. For a $500,000 residential rental property with $400,000 building value, the annual depreciation deduction is approximately $14,545. This 'phantom expense' reduces taxable rental income without any actual cash outlay. When selling, depreciation recapture is taxed at 25%. Cost segregation studies can accelerate depreciation, yielding larger deductions in early years.