Depreciating a Rental Property and What Happens When You Sell

Quick answer: Residential rental buildings are generally depreciated on a straight-line basis over 27.5 years, starting when the property is placed in service and excluding the value of the land. When you sell, the depreciation you took, or were entitled to take, reduces your basis and increases your gain. The portion of the gain attributable to depreciation on the building is generally taxed at a maximum federal rate of 25 percent, with the rest typically treated as long-term capital gain.

Depreciation is one of the best tax benefits of owning rental property. It gives you a deduction every year without spending cash, and it often turns a rental with positive cash flow into a modest tax loss. But depreciation is not a gift. It is mostly a deferral, and the bill comes due when you sell. Having bought, managed, and sold rentals ourselves, we think every landlord should understand both halves of the story before they buy.

How rental depreciation works

The IRS treats a rental building as an asset that wears out over time. Rather than deducting the purchase price in the year you buy, you recover the cost of the building over its recovery period.

For residential rental property, that period is generally 27.5 years using the straight-line method, with a mid-month convention in the first and last years. Commercial buildings use a longer period. Improvements you make later, such as a new roof or a remodeled kitchen, get their own depreciation schedules starting when they are placed in service.

Some components, such as appliances, carpeting, and certain land improvements like fencing or paving, can qualify for shorter recovery periods. A cost segregation study can identify these for larger properties, but for a typical one- to four-family rental it is often not worth the expense.

Depreciation begins when the property is placed in service, meaning ready and available for rent, not when the first tenant actually moves in. The IRS explains the details in Publication 527 and Publication 946.

Separating land from building

Land does not wear out, so it cannot be depreciated. When you buy a rental, you must allocate the purchase price, plus certain closing costs, between land and building.

Common, reasonable approaches include using the ratio from the local property tax assessment or relying on an appraisal. In much of Central New York, assessment records show separate land and total values that can support this allocation. Whatever method you use, document it and keep that documentation with your purchase records.

Allowed or allowable: you cannot skip depreciation

A point that surprises many landlords: when you sell, your basis is reduced by the depreciation that was "allowed or allowable," meaning the amount you were entitled to deduct, whether or not you actually claimed it.

If a landlord never claimed depreciation, perhaps to keep things simple, they still face the tax on that depreciation when they sell, without ever having received the deductions. If you discover depreciation was missed in earlier years, there is often a way to catch it up through an accounting method change rather than amending many old returns. This is worth addressing well before a sale.

What happens when you sell

When you sell a rental, your gain is generally the sale price minus selling expenses, minus your adjusted basis. Adjusted basis is what you paid, plus improvements, minus depreciation allowed or allowable.

That gain is usually taxed in layers at the federal level:

Unrecaptured Section 1250 gain. The portion of the gain equal to the straight-line depreciation on the building is generally taxed at a maximum rate of 25 percent.
Long-term capital gain. Any remaining gain, if you held the property more than a year, is taxed at long-term capital gain rates.
Ordinary income recapture. Depreciation on certain personal property components, such as appliances, can be recaptured as ordinary income.

Higher-income sellers may also owe the 3.8 percent net investment income tax on the gain. The sale is reported on Form 4797, and it often appears on Schedule D as well.

A sale also releases suspended passive losses. If your rental generated losses in prior years that you could not deduct because of the passive activity rules, a fully taxable sale of your entire interest generally allows those losses to be deducted in the year of sale. Our article on passive activity loss rules explains how those losses build up.

New York considerations

New York generally starts with your federal income, so a rental sale flows through to your state return and is taxed at New York's ordinary rates. New York does not have a separate lower rate for capital gains.

New York also does not follow federal bonus depreciation for most property, so state depreciation and basis can differ from federal when bonus was claimed. That difference must be tracked so the state gain is calculated correctly at sale.

If you are a nonresident selling New York real property, the state generally requires an estimated income tax payment or an exemption certification at closing. The New York State Department of Taxation and Finance publishes the current forms and instructions.

Planning ahead of a sale

A few steps make a rental sale less painful:

Gather your original closing statement, improvement records, and depreciation schedules before you list.
Estimate the tax in advance so the sale proceeds are not all spoken for.
Consider timing, such as selling in a year when your other income is lower.
If you plan to buy another investment property, look at a 1031 like-kind exchange before the sale closes, since it cannot be set up afterward.

Frequently asked questions

How long do you depreciate a residential rental property?

Residential rental buildings are generally depreciated over 27.5 years using the straight-line method. Land is not depreciated, and later improvements are depreciated on their own schedules starting when placed in service.

What is depreciation recapture on a rental property?

It is the tax on gain attributable to depreciation you took, or could have taken, while you owned the property. For the building, that portion is generally taxed at a maximum federal rate of 25 percent rather than the usual long-term capital gain rate.

What if I never claimed depreciation on my rental?

You are still treated as having taken it when you sell, so your gain is calculated as if you had. It is usually possible to claim missed depreciation through an accounting method change, which is best done before you sell.

Can I avoid depreciation recapture?

You generally cannot eliminate it, but you can defer it. A properly structured 1031 exchange defers both the capital gain and the depreciation-related gain. Holding property until death can also change the result for heirs, since inherited property usually receives a new basis.

This article is general information for 2026, not tax or legal advice for your situation. Tax rules and figures change; confirm current amounts with the IRS, New York State, or your accountant before acting.