Depreciation on residential rental property spreads the cost of the building over 27.5 years using straight-line depreciation. You take the same deduction each year regardless of whether the property actually loses value. It’s one of the biggest tax benefits of owning rental real estate, but only if you track it correctly.

Start by separating land from building value. The IRS doesn’t let you depreciate land since it doesn’t wear out. When you buy a rental property, you need to allocate the purchase price between land and the structure. Common methods include using the property tax assessment ratio or getting an appraisal. Whatever method you use, document it and keep that documentation permanently.

Calculate your annual depreciation by dividing the building cost by 27.5. If you paid $275,000 for a property and allocated $55,000 to land, your depreciable basis is $220,000. Divide that by 27.5 years and you get $8,000 per year in depreciation expense. The first and last years get prorated based on when you placed the property in service.

Set up your accounting software to track depreciation properly. You need an asset account for each property showing the original cost, an accumulated depreciation account that grows each year, and a depreciation expense account that hits your income statement. Each December, you record a journal entry debiting depreciation expense and crediting accumulated depreciation. The difference between original cost and accumulated depreciation is your book value.

Track improvements separately from the original property. A new roof, HVAC system, or kitchen renovation isn’t a repair expense you deduct immediately. These are capital improvements with their own depreciation schedules. Improvements to residential rental property also depreciate over 27.5 years, starting from when the improvement was placed in service. Keep receipts and document what was done, when, and the cost.

Maintain a depreciation schedule for each property you own. This document lists the asset, date acquired, original cost, land allocation, depreciable basis, useful life, and annual depreciation amount. It tracks accumulated depreciation year by year. When you sell, this schedule tells you exactly what your adjusted basis is. You’ll need this information to calculate gain and depreciation recapture.

Depreciation recapture catches some real estate investors off guard. When you sell a rental property, the IRS taxes the depreciation you claimed at a rate up to 25%. You can’t just take the deductions for years and walk away clean. Accurate tracking ensures you know exactly what you’ll owe and can plan for it.

If you have multiple properties, the tracking gets more complex but the principles stay the same. Each property needs its own cost basis, depreciation schedule, and improvement records. Mixing everything together makes tax preparation harder and increases the chance of errors that cost you money or trigger problems in an audit.

A bookkeeper for small business owners who understands real estate can set up your chart of accounts correctly and record depreciation entries each year. The initial setup takes thought, but once the system is in place, annual tracking becomes routine. The records you build now will matter most when you eventually sell or exchange properties.