Rental Property Depreciation: How to Calculate It (2026)

Key numbers (2026):

• 27.5 years — residential rental recovery period under MACRS straight-line.
• 39 years — nonresidential / transient-lodging recovery period often applied to a short-term rental with average stay under 30 days.
• 100% bonus depreciation — restored permanently by OBBBA for property acquired and placed in service on or after January 19, 2025.
• 5-year and 15-year — the two bonus-eligible asset classes a cost segregation study carves out of the purchase price.
• $3,000–$8,000 — the current range for a formal engineer-prepared cost segregation study on a single-family rental (as of October 2026).

Rental property depreciation is the single largest non-cash deduction most real estate investors ever claim — and it is also the one most commonly left on the table or mishandled. Every year, hundreds of thousands of rental owners either forget to take it, apply the wrong recovery period, allocate too much to land (leaving depreciation money unused), or stop at straight-line without ever considering the cost segregation + bonus depreciation path that unlocks a Year-1 write-off worth tens or hundreds of thousands of dollars.

This is the pillar walkthrough. We'll run through the formula, the 27.5-versus-39-year question that is genuinely unsettled for a short-term rental, how to pull a defensible land value, what a depreciation schedule looks like for a residential rental, and what happens if you don't take depreciation at all. Then we'll run a complete worked example on a real $799,000 Sevierville STR, showing both the straight-line scenario and the cost-seg-plus-bonus scenario so you can see the dollar difference side by side.

How do you calculate depreciation on a rental property?

You calculate rental property depreciation by taking the depreciable basis — purchase price plus capitalized acquisition costs minus the portion allocable to land — and dividing it by the applicable recovery period, with a mid-month convention in the first and last years. For a residential rental, that's 27.5 years. For a short-term rental often treated as transient lodging, that's 39 years. The IRS lays out the full mechanic in Publication 946 (How To Depreciate Property), which is the controlling walkthrough for MACRS on residential and nonresidential real property.

The formula, with each component unpacked:

• Purchase price. The number on the closing disclosure. Full consideration paid, including seller credits that reduce basis.
• Plus capitalized acquisition costs. Title insurance, recording fees, surveys, legal fees connected to acquisition, transfer taxes paid by the buyer. Not loan fees — those amortize separately. Not prepaid interest or property taxes.
• Minus land value. Land is never depreciable. Pull the land-to-improvement ratio from your county assessor's tax card and apply that ratio to the price. More on this in the next section.
• Divided by recovery period. 27.5 for residential rental real property. 39 if you treat the STR as transient lodging. We cover the choice below.
• Prorated by mid-month convention. Under IRC §168(d), real property is treated as placed in service in the middle of the month, regardless of actual placed-in-service date within that month. Your Year-1 deduction is (annual depreciation) × (12.5 − month placed in service) ÷ 12.

Taking a $500,000 single-family rental with $12,000 of closing costs and a 20% land allocation, placed in service July 15: depreciable basis is ($500,000 + $12,000) − ($500,000 × 20%) = $412,000. Annual straight-line depreciation is $412,000 ÷ 27.5 = $14,982. July is month 7, so Year-1 depreciation is $14,982 × (12.5 − 7) ÷ 12 = $6,867. Years 2 through 27 run the full $14,982; a stub in Year 28 cleans up the remainder.

That number is the straight-line default. It assumes the entire depreciable basis sits in the 27.5-year (or 39-year) building shell. For a rental where you've invested in appliances, finishes, landscaping, decking, or any of the amenity package that defines a modern STR, a rental-specific breakdown in IRS Publication 527 (Residential Rental Property) acknowledges that many assets inside the property have shorter lives than the shell itself. A cost segregation study is the mechanic that pulls those shorter-lived assets out of the straight-line schedule and into their proper 5-year and 15-year classes — where they are bonus-eligible.

How do you separate land value from building value?

The IRS cares that your land allocation is reasonable; it doesn't dictate a single method. There are four defensible approaches, in rough order of how often they survive an audit:

1. County assessor ratio. Pull the current property tax card for the parcel. It will show an assessed land value and an assessed improvement value. Compute the land-to-total ratio and apply that ratio to your actual purchase price. The IRS Audit Technique Guide for Rental Real Estate Activities accepts this as the baseline reasonable method. Use the ratio, not the assessor's dollar figures directly — assessor valuations typically lag market by two to five years, but the proportional split holds up well.
2. Formal appraisal with land valuation. If you ordered an appraisal at purchase (most lenders require one), the appraiser's land valuation gives you a second data point. Rarely more generous than the assessor method, but defensibility is highest.
3. Comparable vacant lot analysis. Pull three to five recent vacant-lot sales in the same submarket, average the price per acre or per lot, and apply to your parcel. Useful when the assessor data looks wildly off (common in rapidly-appreciating resort markets).
4. Cost segregation study with land opinion. A formal engineer-prepared cost segregation study will include a land value conclusion as part of the deliverable. This is the most defensible number because it is prepared contemporaneously by a credentialed engineer, with full documentation of methodology.

According to DepreciMax's 2026 study of 197 short-term rental markets, median land ratio across the full universe runs about 28% of purchase price — but the dispersion is wide. The lowest-land-ratio STR markets (cabin-dominated, mountain, lake) run near 15–19%. The highest (coastal Florida condos with land-rich lot allocations, Palm Springs, Tahoe) run above 30%. For a given address, you cannot assume the national median; pull the assessor data for that parcel. For a market-wide view of where land ratios sit nationally, see our walkthrough on land value for depreciation.

27.5 or 39 years for a short-term rental?

Residential rental real property is 27.5 years. A short-term rental where average guest stay is less than 30 days is often treated as nonresidential transient lodging and depreciated over 39 years. This is the single most contested call in short-term rental tax practice, and it is genuinely not settled law — confirm with a CPA before committing to a schedule.

The statute hook sits in IRC §168(e)(2)(A), which defines "residential rental property" as a building where 80% or more of gross rental income comes from dwelling units — and which carves out "a unit in a hotel, motel, or other establishment more than one-half of the units in which are used on a transient basis." Treas. Reg. §1.469-1T(e)(3)(ii) separately defines a rental activity as not a rental activity for passive-loss purposes if the average period of customer use is seven days or less. The two definitions interact uncomfortably: a property can be transient for passive-loss (loophole) purposes while still arguably being residential for depreciation purposes, because the two statutes test for different things.

In practice, three postures exist:

• 27.5-year (residential). The property is a single-family home, operates as a short-term rental today, but could be converted to a long-term rental tomorrow with no structural change. Many CPAs file this way, particularly for assets that look residential by every physical and zoning measure.
• 39-year (transient / nonresidential). The property's operating profile — advertised as a short-term rental, average stays under 30 days, non-dwelling use — triggers the §168(e)(2)(A) carve-out. Common for purpose-built cabin rentals, properties in overnight-rental zoning overlays, and anything branded as hotel-like.
• Mixed-use allocation. Where a property has material personal use alongside rental use, a pro-rated allocation applies. The IRS doesn't permit cherry-picking across tax years.

The dollar impact of the choice is smaller than you'd expect on a bonus-eligible property. On a $500,000 depreciable basis, 27.5-year straight-line yields $18,182 per year; 39-year yields $12,821 per year — a $5,361 annual difference. That matters, but it is dwarfed by what cost segregation plus bonus unlocks in Year 1. The 27.5-vs-39 question governs the residual straight-line stream on whatever portion of basis you don't bonus-depreciate.

What does a depreciation schedule look like?

A rental property depreciation schedule is a line-item list of every depreciable asset in the deal, each with its own recovery period, convention, and bonus-eligibility flag. The purpose is to let MACRS and §168(k) run correctly against each asset class — the building shell goes on 27.5 or 39 years straight-line, but a hot tub, a driveway, or an appliance package belongs on a much shorter clock. Here is the standard taxonomy for a short-term rental:

The right-hand column is the one that matters. Any asset class with a recovery period of 20 years or less qualifies for 100 percent bonus depreciation under §168(k) when placed in service on or after January 19, 2025. The 27.5-year and 39-year classes do not — they continue to grind through straight-line regardless. The exercise of running a cost segregation study is really the exercise of pushing as much of the purchase price as reasonable into the top-table rows and out of the bottom two.

For the complete working taxonomy including the fifty-plus specific sub-categories a formal engineer-prepared study walks through, see our breakdown on depreciation schedule for rental property and the companion piece on bonus depreciation eligible property.

What if you don't take depreciation?

You pay for it anyway. IRC §1016(a)(2) reduces basis by depreciation "allowed or allowable" — whichever is greater. The practical effect: skipping depreciation does not preserve basis. The IRS treats the deduction as if you had taken it, so you lose the deduction in the year it was available and you still owe depreciation-recapture tax on the full amount at sale. Skipping depreciation is strictly worse than claiming it.

Two scenarios where this surfaces most often:

• Loss-generating property, high AGI. Owners sometimes decline to claim depreciation because they already have a loss and don't want to "waste" it. This is a mistake — unused rental losses carry forward under IRC §469, and the depreciation deduction compounds the carryforward. Not claiming does not preserve the deduction for a future year.
• Owner didn't realize depreciation was mandatory to track. Common on inherited properties and self-managed rentals where the owner handled their own returns for years. If you discover you've missed depreciation in prior years, a Form 3115 §481(a) adjustment catches the entire missed amount in a single current-year filing without amending prior returns. For material amounts, this alone is worth hiring a CPA to prepare.

According to DepreciMax's analysis of common rental-filing patterns, roughly one in five self-prepared rental returns either underclaims depreciation by misallocating too much to land or omits a §168(k) opportunity on an asset class that was clearly bonus-eligible. On a median $500,000 STR, each percentage point of under-allocation represents about $5,000 of basis that generates deduction over the schedule rather than remaining non-depreciable — not a trivial sum once compounded across the first few years of ownership.

Worked example: 1337 Lake Haven Way, Sevierville TN

Enough theory. Here is a real address modeled through a DepreciMax property report. Short-term rental cabin, Sevierville TN. We'll run both scenarios: (a) do nothing — just straight-line the whole thing — and (b) commission a cost segregation study and claim bonus depreciation under §168(k).

The inputs:

• Purchase price: $799,000
• Land ratio (from Sevier County assessor data): 18%
• Land value: $143,820
• Depreciable basis: $655,180
• Operating profile: short-term rental, average stay < 7 days, qualifies as transient lodging → 39-year schedule on the building shell
• Placed in service: assumed before December 31, 2026

Scenario A — Straight-line, no cost segregation

The entire $655,180 depreciable basis sits in the building shell. On a 39-year schedule, annual straight-line depreciation is $655,180 ÷ 39 = $16,799 per year. The Year-1 deduction, after mid-month proration if placed in service in September, is roughly $16,799 × (12.5 − 9) ÷ 12 = $4,900. Over the first five years of ownership, cumulative depreciation runs about $71,000.

Scenario B — Cost segregation + 100% bonus depreciation

A cost segregation analysis identifies 32.8% of the purchase price as bonus-eligible — the 5-year personal property (appliances, FF&E, finish flooring, cabinetry, decorative lighting) plus 15-year land improvements (deck, hot tub, driveway, landscaping, outdoor lighting). On a $799,000 purchase price, that's a Year-1 bonus-eligible total of approximately $262,072, deductible 100% in the year the property is placed in service under §168(k). The residual building shell (basis minus bonus-eligible portion) continues on the 39-year straight-line schedule.

At a 37% federal marginal bracket, that Year-1 bonus deduction translates to roughly $96,967 of federal tax savings in the year of placement, assuming the owner clears the STR loophole tests (average guest stay ≤ 7 days plus material participation).

The dollar swing: a Year-1 deduction of roughly $4,900 under straight-line versus roughly $262,072 under cost seg plus bonus. At a 37% federal marginal rate, that is a federal tax-savings swing from about $1,800 to about $96,967 — a $95,000 difference, in Year 1, on a single property.

Two caveats to keep clean. First, Scenario B assumes the owner can use the Year-1 deduction against ordinary income under the STR loophole rules — average guest stay of 7 days or less, plus material participation (usually the 100-hour "most active participant" test). If the loophole fails, the deduction still exists but it becomes a passive loss under §469, offsetting passive income only. Second, the 32.8% bonus-eligible ratio is specific to this property's physical characteristics as scored by the DepreciMax report. A different cabin at the same price could score materially higher or lower depending on finish mix, amenity package, and specific site improvements.

Frequently asked questions

How is depreciation calculated for a short-term rental property?

Depreciation on a short-term rental is calculated as (purchase price + capitalized closing costs − land value) divided by the recovery period, prorated in year one by the mid-month convention. For a residential rental the recovery period is 27.5 years. A short-term rental with an average guest stay under 30 days is often treated as transient lodging and depreciated over 39 years instead — this isn't fully settled law and should be confirmed with a CPA. A cost segregation study carves 5-year personal property and 15-year land improvements out of that basis so the bonus-eligible portion can be written off in Year 1 under IRS §168(k) instead of being stretched across the full life.

What is the correct useful life — 27.5 or 39 years — for a short-term rental?

Residential rental real property is 27.5 years under MACRS. A short-term rental where average guest stay is less than 30 days is often treated as nonresidential transient lodging and depreciated over 39 years, following the §168(e)(2)(A) definition of residential rental property that excludes transient use. In practice, many CPAs still file 27.5-year on single-family STRs where the asset otherwise meets the residential definition and the operating profile could flip (short-term today, long-term tomorrow). This is not fully settled law. Confirm with a tax professional before committing to a schedule, because changing recovery period after the first return filed requires a Form 3115 accounting-method change.

How do I determine the land value I subtract from the purchase price?

Four methods, in rough order of defensibility. One: use the land-to-improvement ratio from the county assessor's current tax card and apply that ratio to the purchase price. Two: order a formal appraisal with a separate land valuation. Three: use a comparable-vacant-lot analysis in the same submarket. Four: use a cost segregation study that includes a land-value opinion. The assessor method is the most common and the one the IRS Audit Technique Guide for Rental Real Estate Activities accepts as reasonable. Pull the ratio, not the dollar figure — assessor dollar values typically lag market by two to five years, but the ratio holds up.

Do I have to take depreciation on my rental property?

No, but you pay for skipping it. Under IRC §1016(a)(2), basis is reduced by depreciation "allowed or allowable" — whichever is greater. If you don't claim depreciation, the IRS still reduces your basis as if you had, so you lose the deduction now and still face the same depreciation-recapture tax at sale. Skipping is strictly worse than claiming. If you missed depreciation in prior years, a Form 3115 §481(a) adjustment can catch it up in a single current-year filing without amending prior returns.

What's the difference between straight-line depreciation and bonus depreciation?

Straight-line is the default: the depreciable basis is spread evenly across the recovery period (27.5 or 39 years for the building shell). Bonus depreciation under IRS §168(k) is a Year-1 accelerator — any property with a recovery period of 20 years or less can be written off 100% in the year it is placed in service. A cost segregation study identifies which parts of the purchase price qualify as 5-year personal property or 15-year land improvements (both ≤ 20 years, both bonus-eligible); those categories then get written off entirely in Year 1 instead of over decades. The building shell itself (27.5/39-year) never qualifies for bonus and continues on straight-line.

Can I claim bonus depreciation on a property I bought in 2024 or earlier?

Yes, but at the phase-down rate in effect for your acquisition year — 80% for 2023, 60% for 2024, and 40% for property acquired and placed in service before January 19, 2025 (pre-OBBBA). The One Big Beautiful Bill Act restored permanent 100% bonus for property acquired and placed in service on or after January 19, 2025. If you own a prior-year property and never performed a cost segregation study, you can still do one now and catch up the missed bonus and accelerated depreciation via Form 3115 §481(a) adjustment on the current year's return.