The deduction that lets you write off money you didn’t spend. An accountant breaks it down.
Depreciation is the most powerful tax benefit in real estate and the one beginners understand the least. As an accountant, I can tell you it’s simpler than it sounds, and once it clicks, you’ll see why the tax code quietly favors landlords.
Usual disclaimer: I’m an accountant, not your accountant. This is the concept in plain English; confirm the specifics for your situation with a CPA.
The basic idea
When you buy a rental, the IRS assumes the building slowly wears out over time. So it lets you deduct a piece of the building’s value every year as an expense, even though you didn’t spend any cash that year. That’s depreciation: a paper expense that lowers your taxable income without touching your bank account.
The mechanics
A few rules that matter:
- Only the building depreciates, not the land. You split the purchase price between the two (the county assessor’s ratio is a common starting point). Land doesn’t wear out, so it doesn’t count.
- Residential rental property depreciates over 27.5 years. Take the building’s value, divide by 27.5, and that’s roughly your annual deduction.
- House hackers depreciate only the rented portion. Since you live in part of the building, you depreciate the share that’s a rental — by square footage or units.
A rough example
Say the building (not the land) on a duplex is worth $300,000, and half is rented. You’d depreciate $150,000 over 27.5 years, about $5,450 a year in deductions you didn’t pay cash for. That number lands on your return as an expense and can erase a big chunk of your rental income, sometimes all of it.
That’s why a house hack can collect real rent and still show little or no taxable profit. The cash is in your pocket; the “loss” is on paper.
The catch nobody mentions: recapture
Depreciation isn’t free forever. When you sell, the IRS “recaptures” the depreciation you took and taxes it. So it’s partly a deferral, you get the deduction now and settle up later. That’s still valuable (money now beats money later), and there are strategies like a 1031 exchange to push it further down the road, but you should know it’s coming. Don’t be surprised at the closing table.
Why it matters for house hackers
Depreciation is a big reason real estate beats most investments on an after-tax basis. You get rent, loan paydown, appreciation, and a deduction that shelters the income. For a regular earner trying to build wealth, that stack is hard to beat.
The practical move: keep clean records of your purchase price, your land/building split, and your rental percentage from day one. That’s what makes the deduction defensible instead of a guess.
See how the rest of the deal pencils out in the calculator, depreciation is the part it can’t show you, but it makes a working deal even better.
Want the depreciation math on your specific property? Send me the details.
For the full picture of how this fits together, see what house hacking is.
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