Rental Property Depreciation and Cost Segregation

Guide · Last reviewed October 10, 2026 · Legal and tax review: pending

Depreciation is the deduction that lets you recover the cost of a building over time, even while the property may be rising in value. For many investors it is the largest tax benefit of owning rental property. It is also the source of a large tax bill when the property is sold, which is why depreciation planning needs a long view.

How ordinary depreciation works

Only the building and improvements are depreciated. Land is not depreciable.
Residential rental buildings are generally depreciated on a straight-line basis over 27.5 years. Commercial buildings use a longer period.
Depreciation starts when the property is placed in service for rental, not when you buy it.
Depreciation reduces your basis, which affects gain on sale.

What cost segregation does

A cost segregation study separates a building's costs into components. Some components, such as certain electrical work, flooring, specialty fixtures and site improvements, may qualify for shorter recovery periods. This moves deductions earlier. Accelerated deductions can also be taken under bonus depreciation rules, which have changed in recent years. Check the percentage that applies to property placed in service in your year.

Key trade-offCost segregation moves deductions forward. It creates a larger tax benefit now, but depreciation recapture can be taxed when the property is sold. Whether the strategy pays depends on your income, how long you will hold the property, and the cost of the study.

Recapture

When you sell depreciated property, the depreciation previously claimed generally increases your taxable gain. Depreciation recapture is taxed under special rules that differ from long-term capital gains. Plan for this before you accelerate deductions, not after.

When a study is usually worth considering

The property cost is high enough that the study fee is small compared with the expected benefit.
You have income that can use the deductions, or passive income to offset them.
You expect to hold the property long enough to balance recapture against the current benefit.
Improvements or a renovation are underway, which makes the cost data easier to separate.

Common mistakes

Ignoring depreciation on property you own, which the IRS may still treat as taken.
Mixing repairs with improvements. Repairs are often deductible immediately; improvements are generally depreciated.
Starting a cost segregation study without modeling the recapture on sale.

General educational information. Depreciation, bonus depreciation and recapture rules depend on the property, the year placed in service and your facts. Confirm the current rules on irs.gov and consult a qualified CPA before making elections or commissioning a study.