How to Calculate Depreciation on Rental Property for Physicians: A Tax Planning Guide
You closed on a duplex in July, handed the paperwork to your preparer, and the return came back with a depreciation number that looks like it was pulled from a hat. It was not. It came from three inputs: what the building cost, how many years the IRS says it lasts, and which month you started renting it.
Here is the short answer to how to calculate depreciation on rental property. Take your purchase price, subtract the value of the land, and divide what is left by 27.5 years for a residential rental or 39 years for a commercial building. Prorate the first year from the middle of the month you placed it in service. That is the whole formula.
The rest of this guide walks through each step, shows why the same building can sit on a 27.5-year, 39-year, or much shorter schedule, and covers the part most rental guides skip entirely: whether a physician can use the deduction at all.
In this blog
What is rental property depreciation and why does it matter to physicians?
Depreciation is a deduction for wear and tear on a building, taken every year you own it. You do not write a check for it. The property can appreciate in value while you deduct it, which is why real estate investors like it so much.
The rules that shape everything that follows:
You cannot depreciate land. The IRS is blunt about it: land does not wear out, become obsolete, or get used up (IRS Publication 946).
Buildings are depreciated straight line. Every full year produces the same deduction. There is no accelerated method for the structure itself (IRC section 168(b)(3)).
Why does a physician care more than the average landlord? Marginal rate. For the 2026 tax year, the 37 percent federal bracket starts above $768,700 of taxable income for joint filers and $640,600 for single filers (Rev. Proc. 2025-32). A $16,000 deduction at 37 percent is potentially worth about $5,920 of federal tax. The catch, covered below, is that a rental loss is passive, and most physicians cannot apply it against clinical income without meeting a specific test.
How do you calculate depreciation on a rental property?
Three steps. You can do this on a napkin, and you do not need a rental property depreciation calculator to get it right.
Step 1: Find your depreciable basis
Start with what you paid, add the closing costs you capitalized and the cost of improvements, then subtract the land.
The land split is where most people guess. The IRS gives you a defensible method: if you are not certain of the fair market values of the land and the building, you can divide the cost between them based on the assessed values on your property tax bill (IRS Publication 527). Pull the assessor's card, compute the land to total ratio, and keep the printout in your file. An appraisal that separates land and improvements works too.
Step 2: Pick the recovery period
The recovery period is the number of years the IRS assigns to the property. Under the general depreciation system (the default MACRS method):
Residential rental property: 27.5 years
Nonresidential real property: 39 years
Both come straight from IRC section 168(c). Which one applies to your building is the subject of the next section, and it is not always obvious.
Step 3: Apply straight line with the mid-month convention
Divide the building basis by the recovery period. That is your full year deduction.
The first year is prorated. Both residential rental and nonresidential real property use the mid-month convention, which treats the property as placed in service in the middle of the month it actually was (IRC section 168(d)(2)). A July start gets half of July plus August through December, or 5.5 months out of 12. A January start gets 11.5 months. A December start gets half a month.
Placed in service does not mean the day the first tenant moves in. Property is placed in service when it is ready and available for a specific use in the rental activity (IRS Publication 527). If the unit was listed and rentable in July but sat vacant until September, your depreciation clock started in July.
The deduction lands on Schedule E, line 18 on the 2025 form. You must also complete and attach Form 4562 in the year you first place the property in service (2025 Instructions for Schedule E).
Residential vs commercial vs short term rental: which depreciation timeline applies?
The recovery period is the single biggest lever in the calculation, and the label on the deed does not decide it. An income test does.
Residential rental property: 27.5 years
A building is residential rental property if 80 percent or more of its gross rental income for the year comes from dwelling units (IRC section 168(e)(2)(A)). A single family home, a duplex, and a 12-unit apartment building all pass easily.
Commercial property depreciation (nonresidential real property): 39 years
Nonresidential real property uses a 39-year recovery period under the general depreciation system.
Short term rentals: 27.5 or 39 years? The transient-use question
This is the part the generic guides get wrong or skip. The statute's definition of a dwelling unit excludes a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis (IRC section 168(e)(2)(A)(ii)). If the units in your property do not count as dwelling units, the building cannot meet the 80 percent test, and it drops to the 39-year schedule.
What counts as transient? Section 168 does not say. Tax practitioners generally look to an older Treasury regulation that treats accommodations as used on a transient basis if the rental period is normally less than 30 days (Treas. Reg. section 1.48-1(h)). That is why your average guest stay matters so much when you run a property on a short term rental platform.
Practitioners do not all agree on how this applies to a single Airbnb condo, and the answer turns on your facts: average stay, how many units, how the property is marketed. Your tax team will make the call. Do not assume 27.5 years because the place has a kitchen.
For how the short term rental route works on the income side, see our guide to the short term rental tax loophole for physicians and our deeper post on short term rental depreciation.
The comparison, side by side
Property type | Recovery period | Annual deduction on $440,000 of building basis | ADS life if required |
|---|---|---|---|
Residential rental (80% test met) | 27.5 years | $16,000 | 30 years |
Nonresidential (commercial, medical office) | 39 years | $11,282 | 40 years |
Short term rental treated as residential | 27.5 years | $16,000 | 30 years |
Short term rental treated as nonresidential | 39 years | $11,282 | 40 years |
Scenario A: long term rental
Purchase price: $550,000
Land at 20 percent: -$110,000
Depreciable basis: $440,000
Full year deduction: $440,000 / 27.5 = $16,000
First year deduction (July, 5.5 of 12 months): $16,000 x 5.5 / 12 = about $7,333
Scenario B: same duplex, run as a short term rental with average stays under 30 days, if her tax team concludes it is nonresidential
Depreciable basis: $440,000
Full year deduction: $440,000 / 39 = $11,282
First year deduction (July, 5.5 of 12 months): about $5,171
Lost deduction versus Scenario A: about $4,718 every full year
Scenario C: an $800,000 medical office condo her practice rents from her LLC
Purchase price: $800,000
Land at 20 percent: -$160,000
Depreciable basis: $640,000
Full year deduction: $640,000 / 39 = $16,410
At a 37 percent marginal rate, Scenario A's $16,000 deduction potentially reduces her federal tax by about $5,920. Whether she can actually use it in 2026 is the next question, and it is the one that separates physician tax planning from generic landlord advice.
How does cost segregation change the timeline?
A building is not one asset. It is a shell plus carpet, appliances, cabinetry, dedicated electrical, parking, fencing, and landscaping. A cost segregation study identifies the building components that qualify for much shorter recovery periods than the building itself, which puts them within reach of bonus depreciation.
That reclassification is what makes bonus depreciation available. Under current law, qualified property acquired and placed in service after January 19, 2025 is eligible for a 100 percent special depreciation allowance (IRS Publication 946, reflecting P.L. 119-21). But qualified property must have a recovery period of 20 years or less (IRC section 168(k)(2)). The building itself never qualifies. The components a study carves out can.
Suppose a study assigns $110,000 of Dr. Okafor's $440,000 basis to short lived components. That $110,000 could potentially be deducted in year one on top of the straight line amount on the remaining $330,000 of building. This is a hypothetical allocation, not a typical result; the actual split depends on the property and the study.
A pair of cautions before you get excited. State treatment can differ from the federal rules, so your state return may not show the same deduction. Your tax team checks how your state handles it. And accelerated deductions come back as ordinary income at sale (more on that below).
Our pillar guide to cost segregation for physicians covers when a study pays for itself. Separate posts compare DIY and professional cost segregation studies and walk through the bonus depreciation schedule under current law.
Can a physician actually use the depreciation loss?
Every rental depreciation guide should open with this sentence, and almost none do: a rental activity is a passive activity by default (IRC section 469(c)(2)).
Passive losses offset passive income. They do not offset your W-2 or 1099 clinical income unless an exception applies.
The exception small landlords rely on, a $25,000 allowance for active participants, is reduced by 50 percent of the amount your modified adjusted gross income exceeds $100,000 and is gone entirely at $150,000 of modified AGI (IRC section 469(i); IRS Publication 925). Married filing separately uses different amounts.
For a single filing physician with modified AGI of $150,000 or more, that allowance is zero.
So what happens to Dr. Okafor's $7,333 first year deduction if her duplex runs at a loss? Any loss created is suspended.
A disallowed passive loss carries forward as a deduction in the next tax year (IRC section 469(b)), and suspended losses are freed when you dispose of your entire interest in the activity in a fully taxable transaction to an unrelated party (IRC section 469(g)).
Generally nothing is lost as long as you eventually sell in a fully taxable transaction. Until then, it is parked.
Two doors let a physician household use the loss now:
Real estate professional status. This requires more than 750 hours a year in real property trades or businesses, and more than half of all your working hours, with material participation (IRC section 469(c)(7)). A full time clinician almost never clears the more than half test, which is why this route usually runs through a nonphysician spouse. Our pillar guide covers real estate professional status for physician households.
The short term rental route. A qualifying short term rental with material participation is treated differently under the passive rules, which is the whole reason the STR classification question above matters twice: once for the recovery period and once for whether the loss is usable. Details are in the STR loophole guide linked earlier.
What happens to depreciation when you sell?
The first thing that happens surprises people.
You cannot skip depreciation to avoid this. Your basis is reduced by the greater of the depreciation allowed or the depreciation allowable (Treas. Reg. section 1.1016-3). The IRS treats you as having taken it whether or not you did.
Gain attributable to the straight line depreciation on the building is unrecaptured section 1250 gain, taxed at a maximum federal rate of 25 percent (IRC section 1(h)(1)(E)) rather than at the lower long term capital gains rates. Because the building was depreciated straight line, there is no ordinary income recapture on the building itself (IRC section 1250(b)). State tax and the net investment income tax may apply on top.
The cost segregated components are a different story. They are section 1245 property, and gain on them is ordinary income to the extent of the depreciation you took (IRC section 1245(a)). The fast deduction in year one is a timing benefit, not a permanent one, so plan the exit before you accelerate.
A like-kind exchange under IRC section 1031 can defer the gain if you trade into other business or investment real property, subject to strict timing rules. Defer is the operative word. It does not disappear. Our post on depreciation recapture covers the full picture at sale.
Missed depreciation? Form 3115 lets you catch up
If a prior preparer never set up depreciation, or used the wrong recovery period, you generally do not go back and amend the prior returns. A change from an impermissible to a permissible method of accounting for depreciation is on the IRS list of automatic accounting method changes (Rev. Proc. 2025-23, section 6.01), requested on Form 3115. The catch-up, called a section 481(a) adjustment, is generally taken in a single year when it is a deduction in your favor (Instructions for Form 3115). Your tax team handles the filing; the point is that the fix exists and does not require reopening old returns.
Frequently asked questions
How do you work out depreciation on a rental property?
Subtract the land value from your total cost, divide by 27.5 years for a residential rental or 39 for a commercial building, and prorate the first year from the middle of the month you placed it in service.
Can I claim 100 percent depreciation on my rental property?
Not on the building. Bonus depreciation applies only to property with a recovery period of 20 years or less. Components identified in a cost segregation study may qualify for the 100 percent allowance under current law if acquired and placed in service after January 19, 2025.
Is it worth claiming depreciation on rental property?
It is not really optional. Your basis is reduced by the depreciation allowable whether you claim it or not, so skipping it costs you the deduction now and does not spare you the recapture later.
When does the 27.5-year clock start if I convert my former personal home to a rental?
You start a new schedule at the time of conversion, but the basis is the lesser of your adjusted basis or the fair market value on the date of conversion (IRS Publication 527). Appreciation while you lived there is not depreciable.
Your depreciation schedule is a planning decision
Four decisions sit inside that one line on Schedule E: how you split land from building, which recovery period applies, whether a cost segregation study pays for itself, and whether the loss is usable this year. Each one moves real dollars, and each one is easier to get right before the return is filed than to fix afterward.
Contact your tax team today to review your basis allocation, recovery period, and whether cost segregation fits your property. Prompt, dependable communication, year round.
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This material is intended for educational and informational purposes only and does not constitute tax, legal, accounting, or financial advice. The content is general in nature and may not apply to your specific circumstances. Tax laws and financial regulations are subject to change and interpretation, and the application of these laws can vary based on individual situations. Before making any decisions, you should consult with a qualified tax advisor, legal counsel, or financial professional.
