What Is Depreciation in Real Estate?

Depreciation in real estate is a tax deduction that allows property owners to recover the cost of an income-producing property over time. Even when a property increases in market value, the IRS treats it as wearing out—allowing investors to reduce taxable income.

How Depreciation Works

Depreciation spreads the cost of buying or improving a rental or commercial property across its useful life, lowering an investor’s taxable income each year.

  • Residential rental property is depreciated over 27.5 years
  • Commercial property is depreciated over 39 years
  • Only the building depreciates — land does not depreciate
  • Depreciation reduces taxable income, increasing cash flow and returns

Most investors use straight-line depreciation, which deducts the same amount each year.

Example of Depreciation

An investor buys a rental property for $300,000. The land is worth $60,000, so the building value is $240,000.

Annual depreciation deduction:

$240,000 ÷ 27.5 years = $8,727 per year

This means the investor can deduct $8,727 from taxable income each year—even if the property’s market value increases.

Depreciation vs. Appreciation vs. Cash Flow

  • Depreciation — IRS tax deduction for property wear and tear
  • Appreciation — Increase in property value over time
  • Cash Flow — Income left after expenses and mortgage payments

Depreciation boosts cash flow by reducing taxes, while appreciation increases long-term value.

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