US rental depreciation: the deduction, the basis adjustment, and the eventual sale

US rental depreciation connects two records: the annual deduction and the property's adjusted basis when it is sold. Keep them together. Skipping a deduction does not generally preserve the basis you would have had without depreciation.

This article uses US federal rules and a hypothetical 2025 individual-owner example. It does not import the elective Canadian capital cost allowance approach. For that separate system, see Should you claim CCA on a rental? Look beyond this year's tax bill.

Establish the asset and the start date

Allocate acquisition basis between land and building using supportable values. Land is not depreciable. Keep the allocation evidence and identify separately purchased assets or later improvements. IRS Publication 551 explains the allocation; US rental deductions: expenses, improvements, and basis covers expense and acquisition records.

Depreciation starts when the property is ready and available for its rental use, which may precede the first tenant's arrival. Buying an unready house does not itself establish that date. Save evidence of readiness and availability. See IRS Publication 946.

Under the General Depreciation System, or GDS, an ordinary residential rental building generally uses 27.5-year straight-line depreciation and a mid-month convention. That convention affects the first and final year. Other systems, property classes and conversions can change the answer; the same depreciation publication provides the distinctions.

A full year of building depreciation

Suppose the property's established acquisition basis is USD 400,000: USD 125,000 land and USD 275,000 building. Assume the building qualifies for the residential GDS treatment above and 2025 is a complete intervening rental year, with no improvements or other basis adjustments.

Using the exact straight-line calculation rather than the IRS's rounded percentage tables, annual building depreciation is USD 10,000: USD 275,000 ÷ 27.5 years. The USD 125,000 land does not enter that calculation. A first or disposal year requires the convention; do not copy the full-year amount into either.

The deduction does not mean that the house lost USD 10,000 of market value, or that USD 10,000 has entered your bank account. It is a tax-cost recovery calculation. Keep the actual depreciation method and schedule with the return.

Basis still changes when a deduction was missed

Basis generally falls by depreciation allowed or allowable. The applicable adjustment can therefore include depreciation you were entitled to claim but missed. Publication 946 explains the distinction. Ask a preparer how to correct an omission; do not assume adding it to a later year is the right procedure.

This is why “I never claimed depreciation, so there is no sale consequence” is an unsafe premise. The important record is what the applicable method permits and requires, not just what appeared in last year's expense list.

The eventual sale: gain and cash answer different questions

For a separate hypothetical sale in 2025, assume the same original USD 400,000 basis, no capital additions, and USD 50,000 cumulative allowed-or-allowable depreciation through disposition, including any required final-year amount. That cumulative amount is stipulated from the schedule; it is not five assumed full years.

The cash sale price is USD 500,000, selling costs USD 30,000 and mortgage payoff USD 240,000. Assume no sale exclusion, exchange, casualty adjustment, other section 1231 gains/losses or prior losses affecting characterization.

The USD 240,000 debt payoff changes cash received; it is not another deduction from gain. IRS Publication 544 explains the gain framework.

For characterization, assume supported sale values allocate USD 137,500 of the price to land and USD 362,500 to building. Allocate costs in the same ratio: USD 8,250 and USD 21,750. Land gain is 137,500 − 8,250 − 125,000 = USD 4,250. Building gain is 362,500 − 21,750 − 225,000 adjusted building basis = USD 115,750. Together they reconcile to USD 120,000.

That allocation matters because depreciation relates to the building. Do not assign a convenient sale split without valuation support.

What “recapture” can obscure

For this stipulated long-held, straight-line building case, USD 50,000 of gain is associated with depreciation and USD 70,000 is the remaining gain. The depreciation component can enter unrecaptured section 1250 gain, with a maximum individual federal rate of 25%. It is not automatically all ordinary-income recapture or a flat 25% tax on the entire sale. See Publication 544 and IRS Topic 409.

Actual characterization and tax depend on the asset, holding period, other gains/losses and return worksheets. Appliances or specially depreciated components can have different treatment. Overall income, state tax and other applicable taxes also matter. This example establishes basis, gain and pre-tax cash; it does not quote the seller's final tax.

Before comparing a sale with keeping the property, collect acquisition/allocation evidence, improvements, all depreciation schedules and expected selling/debt costs. Keep or sell a rental: compare the next chapter, not just the past helps organize that decision. A sale cash estimate built only from the mortgage balance is missing the tax-basis record.

Sources

Official guidance checked October 1, 2026. Federal worked examples use 2025; state figures carry their stated period.

• Publication 551: Basis of assets — IRS.
• Publication 946: How to depreciate property — IRS.
• Publication 544: Sales and other dispositions — IRS.
• Topic 409: Capital gains and losses — IRS.