When you convert a primary residence to a rental property, you can depreciate the building value (not land) over 27.5 years. For example, if the building is worth $240,000, you can deduct roughly $8,727 per year. Depreciation reduces your taxable rental income and can create a paper loss on your tax return.
Calculating Depreciation
The IRS allows you to depreciate residential rental property over 27.5 years using straight-line depreciation. Your basis for depreciation is the lower of the fair market value at conversion or your adjusted cost basis, minus the land value. A property bought for $300,000 with $60,000 land value gives you a $240,000 depreciable basis: $240,000 divided by 27.5 equals $8,727 per year.
Building Value vs Land Value
Land cannot be depreciated. You must allocate the purchase price between building and land based on the county appraisal ratio or a professional appraisal. If the Bexar Appraisal District values your property at 80% building and 20% land, apply those percentages to your cost basis.
Depreciation Recapture When You Sell
When you sell a rental property, the IRS recaptures depreciation at a flat 25% rate, regardless of your tax bracket. This applies to the depreciation you took (or could have taken). Plan for this tax bill when calculating your net proceeds. A 1031 exchange can defer depreciation recapture.