Planning topic · Real estate
Depreciation is the largest deduction on a rental and the one most often computed wrong. An error is not only this year’s tax: it all comes due when the property is sold. We check your past depreciation and basis, then plan the tax at each stage — buying, holding, improving and selling.
Why depreciation matters
Many owners file their own returns or have changed preparers several times; nobody has checked the depreciation schedule in years.
Depreciation missed or computed wrongly in the past can usually be corrected in one year through a change in accounting method (Form 3115), without amending each old return; which route applies depends on how many returns carry the error. That is the first thing a check-up establishes.
Four stages
A decision at each stage shapes the tax for years afterwards.
One by one
Not all of them apply to you. Step one of a check-up is deciding which do.
Residential rentals are depreciated straight-line over 27.5 years, nonresidential property over 39. Land is not depreciable, so the price is split between land and building.
The land share in closing documents, the property tax assessment or an appraisal, and the basis used on past schedules.
On conversion the depreciable basis is the lower of adjusted cost or fair market value on that date, again excluding land.
The conversion date, support for the value then, and improvements made before it.
On sale, basis is reduced by depreciation allowed or allowable, whichever is greater. Once the wrong treatment appears on two or more consecutive returns, the fix is generally a change in accounting method on Form 3115; the missed amount can be taken in the year of change.
Depreciation schedules on past returns, the year the error began, and the correction route that applies.
Improvements (longer life, more value, a new use) are capitalized and depreciated; routine repairs are deducted currently. Items of $2,500 or less per invoice or item can be expensed under an elective safe harbor.
Large outlays of recent years, classified one by one, and whether the yearly elections were made.
Appliances, carpet and furniture are 5-year property; fences, driveways and other land improvements are 15-year. Such property acquired and placed in service after January 19, 2025 can be depreciated 100% in the first year; the building itself cannot. State rules may differ.
When and for how much the property was bought, whether a study is worth it, and whether your state follows.
Rental losses are generally passive. An owner who actively participates may deduct up to $25,000 a year against other income, phased out between $100,000 and $150,000 of modified AGI. Unused losses carry forward and are released on a fully taxable sale of the whole property.
Your income level, the losses carried forward, and when they become usable.
With an average stay of 7 days or less the activity is not a "rental activity"; with material participation the loss can escape the passive limits. Hotel-like services can bring self-employment tax. A real estate professional needs more than half of working time and more than 750 hours a year, and must materially participate in the rentals.
Stay records, your hours and how they are logged, and the services provided.
Depreciation taken while rented is taxed at up to 25% on sale, and the home-sale exclusion does not cover it. A 1031 exchange applies only to investment or business real property, with 45 days to identify and 180 to complete; U.S. and foreign property are not like-kind.
The expected price, total depreciation, losses carried forward, and whether to exchange or sell.
Common mistakes
Each of these is specifically warned about in IRS publications.
How we work
The same levels as our tax planning service, built around your property.
Before buying, selling or converting, settle the specific questions. The CPA explains the rules and options, and you receive a written recap.
We review your last two returns and the depreciation schedules: basis, land split, lives, improvements and losses carried forward — with the problems, the correction route and this year’s projection.
For a purchase, cost segregation, short-term rental, sale or exchange: each option computed and compared, written up and explained.
Typical situations
Hypothetical situations that show how planning works — not client results. Conclusions differ for everyone.
A rental bought ten years ago, self-prepared returns, depreciation never claimed, and a sale now planned.
They moved to another state, the former home became a rental, and a sale is considered three years later.
Both spouses have high salaries and bought a short-term rental this year, hoping depreciation will offset wages.
Usually yes. In most cases a change in accounting method recovers the missed depreciation in one year, without amending each return. The route depends on how many returns carry the error; a check-up establishes that first.
Because on sale the law reduces basis by depreciation allowed or allowable — taken or not. Skipping it only gives up the deduction.
Commonly by the land and building ratio on the property tax assessment, or by an appraisal. The method must be reasonable and documented.
An owner who actively participates may deduct up to $25,000 a year, phased out between $100,000 and $150,000 of modified AGI; above that the loss carries forward. Real estate professionals and qualifying short-term rentals follow other rules.
It depends on the price, when you bought, your income and how long you will hold. It brings depreciation forward, and that part is recaptured on sale — so compute first.
Depreciation from the rental years is taxed at up to 25%; the rest of the gain at long-term capital gain rates; higher incomes may also owe the 3.8% net investment income tax.
By default 30% is withheld on gross rent. You can elect to be taxed on net income (after expenses and depreciation), but the election must be made and a return filed each year. FIRPTA withholding applies on sale.
Yes. Rent from a foreign rental goes on the U.S. return, depreciation runs over 30 years rather than 27.5, and tax paid locally may be creditable.
Fixed fees, quoted before work starts. They follow the scope and complexity of the work, never the amount of tax saved.
Request
About 3 minutes. Sending a request costs nothing and is not an engagement.
Book a one-on-one paid consultation with a CPA and know the tax before you sign. The fee is credited if you move on to planning.
This page is general information, not tax advice for your situation. Conclusions depend on the facts you provide and the law in force; the figures and percentages shown were current when written and may change, and state rules may differ.
