Depreciation is one of the most powerful tax benefits in real estate investing. The IRS allows you to deduct a portion of a property's value each year as a non-cash expense, reducing taxable income even if the property is appreciating in value.
Only the structure is depreciable — land cannot be depreciated. A $400,000 property with $80,000 land value has a $320,000 depreciable basis → $11,636/year depreciation deduction.
This can shelter significant rental income from taxes. At a 28% tax rate, $11,636 of depreciation saves ~$3,258 per year in federal taxes.
Related Terms
Bonus Depreciation
Accelerated IRS deduction allowing investors to write off a large percentage of qualifying property components in year one.
Cost Segregation
IRS-approved engineering study that reclassifies building components to shorter depreciation lives, accelerating tax deductions.
Depreciation Recapture
Tax owed on previously claimed depreciation deductions when a rental property is sold.