Depreciation is one of the most powerful tax benefits available to real estate investors. It allows you to deduct a portion of your property's cost each year, reducing your taxable income without affecting your actual cash flow. Here’s what you need to know in 2025.
How Standard Depreciation Works
When you buy a rental property, you can't deduct the entire purchase price at once. Instead, you deduct a portion of it each year over the property's "useful life." For residential rental properties, the IRS sets this at 27.5 years. You simply take the cost basis of the building (purchase price minus the value of the land) and divide it by 27.5 to get your annual depreciation deduction.
Supercharging Depreciation with Cost Segregation
While standard depreciation is good, a cost segregation study makes it much better. As we explain in our introductory article, cost segregation identifies building components that can be depreciated faster. This front-loads your deductions, giving you more cash today that you can use to pay down debt, save for another property, or cover expenses.