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USA Tax Glossary
Depreciation is the annual deduction that lets a taxpayer recover the cost or other basis of business or income-producing property over a number of years.
Investor Context
Rental property owners generally depreciate the building or depreciable improvements, but land is not depreciable. Depreciation also reduces basis, which matters when the property is later sold or exchanged.
Why It Matters
It can materially affect annual rental real estate taxable income.
It requires accurate basis allocation between land and depreciable property.
Allowed or allowable depreciation can affect gain calculations when a property is sold.
Records To Prepare
Closing statement and purchase price allocation
Land and building value support
Improvement invoices
Prior depreciation schedules
Common Caution
Mortgage principal payments are not depreciation. Land is generally not depreciable.
Direct Answers
Generally, no. IRS guidance states land is not depreciable because it does not wear out, become obsolete, or get used up in the same way depreciable property does.
Yes. Depreciation reduces basis and may create recapture or unrecaptured Section 1250 gain considerations when property is sold.
Official IRS Reference
IRS: Publication 527, Residential Rental PropertyRelated Terms
Form 4562 is used to claim depreciation and amortization, make Section 179 elections, and provide listed property information when required.
Depreciation recapture rules can cause part of the gain on sale of depreciated property to be taxed differently because depreciation deductions were allowed or allowable before sale.
Cost segregation is an analysis that separates parts of real estate into components with different depreciation treatment, often to identify shorter-lived property within a larger building acquisition or improvement.
