Rental Property Depreciation Explained: How It's Calculated

David Wiener: There's one deduction on your rental property the IRS counts against you, whether you take it or not. Skip it for 10 years, and when you sell, the IRS figures your gain as if you'd taken every dollar of it. You never got the write-off, you still pay taxes on it. That deduction is depreciation. Most rental owners have never seen how theirs is calculated, and a surprising number of them are taking too little of it, starting on the wrong date or not taking it at all. Today we fix that. Welcome back to the Tax Strategy Playbook. I'm David Wiener. Some of you know me as Mr. Cashflow. Today's a solo show and a one-week break from the Research and Development Tax Credit Series. Last week we opened that series with the payroll tax offset. And next week we pick it right back up. This week belongs to the rental owners, and honestly, it's the one I probably should have recorded first. Rental property depreciation, what it is, how it's calculated, the three numbers on your tax return that decide it, And when the standard twenty seven and a half year schedule is the slowest way to depreciate your building instead of the only way. I've Done a lot of episodes that assume you already know this part. Episode 27 was about catching up depreciation you missed. Episode 17 was about what happens to depreciation when you sell. Both of those start in the middle of the story. This one starts at the beginning. It's built for three different people: the investor who owns one to five rentals and has never once looked at the depreciation line on their own tax return, the business owner who's thinking about buying a rental. or already bought one and wants to know what they're actually getting, And the tax professionals listening who'd like a plain English version to hand to the client who keeps asking why the number is what it is. Quick heads up before we get rolling. About halfway through, I'm going to run one duplex through the whole calculation start to finish with real math. And then I'm going to take apart the most expensive piece of bad advice on this topic, the one that says skip depreciation and you'll skip the tax bill later. At the end, the playbook. Including the one number most rental owners can't find on their own and how to get it. If you only catch the first 10 minutes, you'll get the definitions and miss the part that tells you whether your return is right. Stick around. Let's start with the idea in plain English because everything else depends on it. When you buy a rental property, you don't get to deduct the purchase price in the year that you buy it. The tax code treats the building as something that wears out over time. And it lets you deduct a slice of its cost every year across a set number of years. That yearly slice is called depreciation. For a residential rental, a house, a duplex, an apartment building, the set number is 27.5 years. For commercial property, an office, a warehouse, a retail building, it's 39 years. Those numbers come straight from the tax code. You don't pick them, your tax professional doesn't pick them. And you can't shorten them because you plan to sell the property early. Now here's the part that sounds strange the first time you hear it. In the real world, your building is probably going up in value, not down. The deduction exists anyway. Congress wrote it that way on purpose, so that people who put private money into housing and buildings get a steady write-off for doing it. And it's why depreciation is one of the few deductions where you get a tax break without spending another dime that year. Think about what that means for your return. The rent comes in, you pay the mortgage interest, the taxes, the insurance, the repairs, and then on top of all of that, there's a line for depreciation that costs you nothing out of pocket this year. It's a paper expense. Real deduction, no check written. That's why a rental can put cash in your pocket and still show a very small profit or even a loss on your tax return. That depreciation line is doing that work. And let me clear up a mix-up I run into a lot. Your mortgage payment isn't your deduction. The interest part of the payment is deductible on a rental. The principal part isn't, because paying down a loan isn't an expense. So how do you ever get a deduction for the money you actually paid for the building? Depreciation. That's the mechanism. It's how the cost of the building works its way into your tax return, one slice a year, whether you paid cash or borrowed every single dollar. Which also means the loan doesn't change your basis. If you bought a $400,000 rental with $80,000 down, you don't depreciate $80,000. You depreciate the building portion of the full $400 because that's what you paid. The bank's money counts as your money for this purpose. Three things decide how big that line is. How much of what you paid can be depreciated. When the clock starts, and how the long the clock runs. We covered that third one already. 27 and a half years for residential, 39 years for commercial, which brings me to the first one, and it's where most of the mistakes live. Your depreciable number is called your cost basis. Basis is just the tax word for what you've got invested in the property. And to find the depreciable part, you start with what you paid, you add certain costs, and you take one very big thing out. Start with the purchase price. Then you add the closing costs that belong to buying the property. IRS Publication 527 lists them. Abstract fees, legal fees, recording fees, surveys, transfer taxes, title insurance. If you agree to pay something the seller owed, like back property taxes, that goes in too. Those costs become part of what you paid for the property and they get depreciated right along with it. Some closing costs don't go in though. Anything tied to getting the loan, like points, a loan origination fee, a credit report, the appraisal your lender required, those follow their own rules. Fire insurance premiums don't go in either. Rent you paid to move in before closing doesn't go in either. So when someone tells you to depreciate everything on the settlement statement, that's not right either. Your tax professional sorts that out line by line. And now the big thing you take out, land. Land doesn't depreciate, not ever. Not without a study, not with a study, not in any strategy I'll ever talk about on this show. The IRS's reasoning is simple. Land doesn't wear out. So every rental you own has to be split into two pieces, the dirt, which you never depreciate, and the building sitting on it, which you do. So how do you split it? Publication 527 says you allocate the cost by the fair market value of each piece. And it gives you a practical way to do that. If you aren't certain of the values, you can divide the cost based on the assessed values for real estate tax purposes. That's the county tax assessor. Your county already values the land and the building separately every year. You take the ratio, the percentage that's land, and you apply that percentage to what you paid. An appraisal that breaks out land and buildings work too. Notice what I said: you apply the percentage. You don't use the assessor's dollar figure for land. The assessor might say your land is worth $60,000 on a house you paid $400,000 for. But assessed values almost never match what you paid. What travels is the ratio. Here's how to do it by yourself in about five minutes. Go to your county tax assessor's website. Most of them let you search by address or parcel number, pull up the property, and find the assessment for the tax year closest to when you bought it. You'll see a land value and an improvement value, which is the assessor's word for the building. Divide the land by the total. That's your land percentage. Write it down. Take a screenshot of the page with the date on it because that screenshot is your support. If anybody ever asks you where that number came from, here's the myth I hear constantly. Just call the land 20%, everybody does it. That's a rule of thumb and it isn't a method. Publication 527 says fair market value or the assessor's ratio if you're not sure. A flat 20% is neither one. And the land share swings wildly depend on where the property sits. Back in episode 10, Ryan Bakke told us that in the Smokies he's rarely seen land come in above 10% of a single family purchase. While at the beach in Gulf Shores, it can run 65% or 70%. I told him about a property I'd looked at in Los Angeles where the land came in at 87.5%. I just ran one where the land came in at 97%. You put a flat 20% on that house and you've claimed depreciation on dirt. Put 20% on the cabin in the smokies and you've left some real deductions on the table every year for 27.5 years. And I want to be fair to the tax professionals listening because this usually isn't their mistake. Your settlement statement doesn't tell anybody what the land's worth. When a client hands over a closing statement and nothing else, a tax professional has to use something. And a percentage is what's available. That's why the playbook at the end sends you to go get the assessor's ratio yourself and hand it over. It's a five-minute lookup that nobody asks you to do. You can also just give me a call if you can't find it and I can help you get that number. One more thing goes into the basis after you buy, and we'll spend a whole section on it. Capital improvements. The new roof, the new HVAC, the addition, a new bathroom, a new kitchen. Basis isn't a number frozen at closing. It grows when you put money into that building. So that's how much? Now let's talk about when. Because the day you close isn't the day your depreciation starts. It starts the day the property is placed in service. Placed in service is a tax phrase with a plain meaning. Publication 527 again puts it this way. You place property and service in a rental activity when it's ready and available for a specific use in that activity. For a rental, that means ready and available for rent. Not rented, available. Listed, advertised, move in ready. The IRS's own example in publication 946 is a house somebody fixes up and starts advertising for rent in the local paper. It's placed in service the month it's ready and available for rent, not the month they bought it and not the month the first tenant moved in. So if you close in February and you spend two months on a rehab and it's ready to rent in April, the clock starts in April. If you claim depreciation starting in February, you've claimed two months you weren't entitled to. Here's why I keep asking for two dates every time I talk with somebody about a property. The closing date Or really the date the purchase contract became binding and the placed in service date. They're often different and both really matter. The placed in service date starts your depreciation. And under the rules Congress passed in 2025, the contract date and the placed in service date together decide what bonus depreciation rate you get if you ever do a cost segregation study. We'll get to that near the end. Now there's one more piece to the clock. And it's the reason your first year always looks a little bit odd. it's called the mid-month convention. For rental real estate, the IRS doesn't care what day of the month you place the property in service. It treats every building as if it went into service at the middle of that month. The Form 4562 instructions say exactly that. The convention treats all property placed in service or disposed of. during any month as placed in service or disposed of on the midpoint of that month. So a rental placed in service April gets eight and a half months of depreciation that first year. Half of April plus May through December. A rental placed in service in December gets half a month. You don't lose it either. The half month you don't get at the start comes back at the very end of the 27 and a half or 39 years. The same convention works on the way out by the way. Sell in the middle of year six and you get half a month of depreciation for the month in which you sold it. And one question I get a lot. What happens when a tenant moves out and the unit sits empty for two months while you clean it up to find a new one? You keep on depreciating. Publication 527 says you continue to claim depreciation on property used in your rental activity, even if it's temporarily idle. Vacancy does not stop the clock. Okay, enough theory. Let me put some numbers on it. Everything in this section coming up is an illustration I put together to show the mechanics. It's not a particular client, and your numbers are going to be your own numbers. But say you buy a duplex for $400,000. You sign the purchase contract in December of 2025. You close in February of 2026. Your closing costs that belong in basis, the title insurance, the recording fees, the transfer tax, the legal fees. Come to $6,000. So your total cost is $406,000. You go ahead and pull up the county tax assessor's website. The assessor has the land at 25% of the total assessed value. So 25% of your $406,000 is land. That's $101,500 you'll never depreciate. What's left, the $304,500, is your depreciable building basis. You spent February and March on paint, floors, a couple of fixtures, and the duplex is ready and listed for rent in April of 2026. That's your placed in service date, April. If you've ever searched how to calculate depreciation on rental property, this is the whole answer. $304,500 divided by 27.5 years is about $11,070 a year. That's the full year of depreciation on this duplex. But year one's not a full year. April placed in service means eight and a half months under the mid month convention. Eight and a half twelfths of eleven thousand seventy is about seven thousand eight hundred and forty dollars. That's your 2026 depreciation. Then eleven thousand seventy every year after that until the final partial year picks up the half month you didn't get at the very beginning. So let's put that in tax dollars. And again, this is an illustration. If that deduction is usable against your income and you're in the 24% bracket, $11,070 a year of depreciation is worth roughly $2,650 a year in federal tax every year for writing no checks at all. Now let's break it the way it most often breaks. Same duplex. Nobody looked up the assessor. Somebody put forty percent on land instead of twenty-five. Now the building basis is two hundred and forty-three thousand six hundred instead of three hundred and four thousand five hundred. Divide by 27 and a half, and the yearly depreciation drops to about $8,860. You just lost $2,210 of deductions a year. Over 27.5 years, that's roughly $60,900 of depreciation that never shows up on any return that you file from one number typed into one box. Now break it the other way. Somebody starts the clock at closing in February instead of April. That return claims $9,690 of depreciation for 2026 instead of $7,840. That's too much. And it's the kind of thing that turns into a correction letter later. One more thing to watch in this example because it sets up the myth section. Every year of depreciation lowers your basis in the building. After 10 years of holding this duplex, you will have taken roughly $107,000 of depreciation. The first partial year plus nine full ones. Your building basis drops from 304,500 to about 197,000. When you sell, your gain is figured from that lower number. The system is designed to work that way. You've got the depreciation on the way in, and the IRS settles up with you on the way out. Keep that in mind because the worst advice on this subject pretends that settling up only happens if you took the deduction. The math is simple, the inputs are where it goes wrong, and your tax professional can only work with the inputs that they have. Quick pause before we keep going. If you'd like the playbook notes for this episode, including the duplex math laid out on one page so you can run your own numbers against it, subscribe to the Tax Strategy Playbook newsletter at TaxstrategyPlaybook.com slash newsletter. It's absolutely free. And it gives you access to my 2026-2027 tax planning guide and the playbook notes for every episode of the podcast at no charge. So you've bought it, you split the land out, and the clock's running. What happens when you start putting money into the building? Because every rental owner eventually writes a big check for the building. And the first question is whether that check is a repair or an improvement, because the tax treatment is completely different. A repair keeps the property in its ordinary operating condition. Fixing a leak, replacing a broken window, patching drywall, you generally deduct a repair in the year you pay for it. An improvement makes the property better, restores it or adapts it to a new use. A roof, a new HVAC system, replacing all the windows, an addition. You don't deduct an improvement in the year you pay for it, you depreciate it. The line between the two has its own body of regulations and your tax professional draws it, but there's one simplifier worth knowing by name, the De Minimus Safe Harbor. If you make the election on your return each year and you follow a consistent practice in your books, you can generally deduct items that cost $2,500 or less per invoice or per item without having to decide whether they're improvements or not. It's an annual election, a statement attached to your timely filed return. Ask your tax professional whether it's on yours. Now, here's how an improvement gets depreciated, and it surprises people. It doesn't get added to the building's existing schedule. It's treated as its own separate asset with its own start date and its own clock. Publication 527 says it plainly. Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. And the recovery period is the one that would apply to the original property if you placed it in service at the same time. So back to our duplex. This is still the illustration. In 2028, you put on a new roof for $16,500. That roof is its own asset. It starts its own 27.5 year clock in the month it's finished. With its own mid-month first year. About $600 of depreciation on the roof for 27 and a half years. And here's the roof problem. What happened to the old roof? It was part of your original building basis. Unless something is done about it, you keep depreciating the old roof that's sitting in the dumpster right alongside the new one on top of the building. Two roofs on a depreciation schedule, one on the building. There's a fix for that. It's called partial asset disposition. It lets you write off the remaining basis that you tore out in the year that you tore it out. It's made on the return for that year, which is why it gets missed so very often. Nobody knew the old roof's number to write it off. We talked about this in episode 10 when Ryan Bakke and I got into renovations on short-term rentals. If you're planning on a big replacement, ask about it before the return for that year gets filed. Let me show you how that plays out on the kind of checks you actually write. And this is still illustration territory. A tenant moves out and you replace the dishwasher for $900. If you've got the de minimis election on your return, that's generally deducted this year. A few months later, the air conditioning dies and you put in a new system for $9,000. That's an improvement to the building. And on a rental house, the heating and air system is part of the building itself, the structural part. So that new system goes into its own 27 and a half year clock. Same year, same property, two very different results. And the difference is what the item is, not how much it cost. Last piece of this section. Not everything inside of a rental is a building. Publication 527 lists appliances, carpeting, and furniture used in rentals as five-year property. Really, anything non-structural inside. It's five-year property, not 27 and a half-year property. So the refrigerator, the washer and dryer, the carpet, the furniture, and a furnished rental, those are depreciated a lot faster than the walls around them. Hold on to that idea because it's the whole reason the last big section of this episode exists. Before we get there though, I've got to take apart the worst advice on this whole subject. There are two, and I hear both of them all the time. One on social media and one from rental owners themselves. The first one goes like this. Don't take depreciation on your rental. If you never take it, you'll never have to pay it back when you sell. It sounds clever, but it's backwards. Publication 946 says you must reduce the basis of your property by the depreciation allowed or allowable, whichever is greater. Allowed is what you actually deducted. Allowable is what you were entitled to deduct. So the IRS lowers your basis by the depreciation you could have taken, whether you took it or not. Follow that through to the sale. A lower basis means a bigger gain. The part of the gain that comes from depreciation on the building structure gets taxed at a federal rate of up to 25%. And because the IRS counts what was allowable as well as what was allowed, the depreciation you skipped if you did still counts. You never got the deduction, you still pay tax on it when you sell. That's the deduction I opened this episode with. So skipping the deduction. Doesn't avoid the bill at the end, it just makes sure you never got the benefit that was supposed to come with it. If you're sitting there realizing you haven't been taking it, don't panic. And don't try to fix it by amending three years' worth of returns. Once the same method has been used on two or more consecutively filed returns, it's generally treated as an accounting method, and the fix is a change in accounting method on Form 3115. That catches up every missed year on one current return. Episode 27 walks through that exactly how it works. If that's for you, that's your next listen. The second myth is quieter, and I hear it from rental owners all the time. My rental already shows a loss. Depreciation doesn't really matter to me. Trust me, it matters. It may not matter this year, but it matters. If real estate isn't your main job, rental losses are generally passive, which means they Can't offset your paycheck or your business income, but they don't disappear. Losses you can't use this year carry forward to next year. And when you sell the property, the ones still waiting generally get freed up against that sale. And there's an exception a lot of people qualify for without knowing it. Publication 925 has a special allowance for people who actively participate in their rental. Meaning you can make the management decisions, approving tenants, setting the rent, signing off on repairs. You can deduct up to $25,000 of rental loss against your other income. That allowance starts shrinking once your modified adjusted gross income passes $100,000, and it's gone when you reach $150,000. Episode four is the full conversation on passive losses with Gabriel Virdaru So depreciation on a rental that already shows a loss isn't wasted. It's either usable now, usable later, or it's lowering your tax bill the year you sell. Every one of those beats not taking it at all. Here's a favor, and it's not for you. Think of one person you know who owns a rental and does their own taxes, or who told you they don't bother with depreciation because the property loses money anyway. Send them this episode. Just that person, by name. It might be the most valuable time of the tax year. Now let's handle the situations where the normal rules bend just a little. Three situations come up constantly, and each one changes the math. First is the home you used to live in. You move out, you keep the house, and you rent it. Very common. Happens all the time. The question is: what basis do you depreciate? The answer is in publication 527. When property you used personally becomes a rental, its basis for depreciation is the lesser of its adjusted basis or its fair market value on the date you converted. Here's why the IRS uses the lesser of those two. The tax code doesn't let you depreciate a personal loss. Two quick illustrations. You bought a home for $300,000, you put $25,000 worth of improvements in it, and it's worth $450,000 when you move out and rent it. Your depreciable basis starts from the $325,000, not the $450,000, because that's the lesser number. You don't get to depreciate the appreciation of the property. Now flip it. You bought at the top of the market for $500,000 and it's worth $420,000 the day you convert it. Now your basis for depreciation starts from $420,000, not $500. Either way, you still take the land out. And the clock starts on the date it's ready and available for rent, not the date you originally bought it. The second one is the rental that you inherit. When you inherit property, your basis is generally the fair market value on the date of death. That's a stepped up basis we covered in episode 19. And it means the depreciation clock starts over for you on a fresh number from the date you place it in service as a rental. Whatever depreciation the prior owner took. doesn't come with it. Get the date of death value in writing, usually from an appraisal, and get the land split out of that value the same way we did for the duplex. The third is about the short-term rental. If your property rents mostly by the night or the week, there's a real question about which clock it's on. Here's why. The 27 and a half year schedule is for rental residential property and the tax code's definition of a dwelling unit leaves out units used on a transient basis. meaning short stays. So most tax professionals treat a short-term rental where the average stay is short, commonly 30 days or less, as a non-residential property. That's 39 years instead of 27 and a half. It's a judgment call on your facts, and it's one your professional makes. And it's worth asking about directly because a short-term rental placed on the 27 and a half year schedule may be taking more depreciation than it should. And one more for the business owners because this one's easy to miss. A lot of you own the building your company operates out of, often in a separate LLC that leases it to the business. That building's commercial, so it's on the 39-year schedule. Same land split, same placed in service rules, same mid-month convention. But renting a building to a business you actively run comes with its own set of rules, usually called the self-rental rules. That changes how the income and losses from that lease get treated. Your tax professional will know them. What you should know is to ask and to bring the same two dates and the same land split we've been talking about all episode, which leads to the real question Is twenty seven and a half years or thirty nine years the best you can do? Remember the refrigerator or the carpet? Five-year property sitting inside a rental. Here's the thing: your building is full of pieces like that. Cabinets, countertops, certain flooring, wiring that serves one specific appliance. And outside, the driveway, the fencing, the landscaping, the parking, some of that is five-year property, some is seven-year property. The site work is generally 15-year property called land improvements. So When you buy a building, none of that is broken out on your settlement statement. So by default, all of it gets lumped into the building and depreciated over 27.5 or 39 years, right along with the foundation. It's allowed. It's also the slowest way to do it. An engineering-based cost segregation study is what separates those pieces. A trained professional visits the property in person, photographs, and measures it. And engineers go through it component by component and move each piece into the recovery period it actually belongs in. Five, seven, or fifteen years instead of twenty-seven and a half. And once a component is in one of those shorter buckets, bonus depreciation can reach it. Bonus depreciation is what lets you deduct a big share of those shorter life components in the first year instead of spreading them out. One more time, let's go back to our duplex. Still in illustration. Say a study found 25% of that $304,500 building belonged in the 5, 7, and 15-year buckets. I use 25% because it's very conservative. Studies find more or less depending on the property, often more. But that at 25% is about $76,125 worth of components. Our owner signed the purchase contract in December of 2025 and placed the duplex in service in April of 2026. Both of those are after the January 19th, 2025 date. Under the One Big Beautiful Bill Act, that property qualifies for 100% bonus depreciation. Both dates have to be after January 19th. If a contract had been signed in December of 2024 instead, the property would still be on the old phase down schedule. And for something placed in service in 2026, that's 20%, not 100%. The study doesn't change that. The dates do. At 100%, the owner deducts the full $76,125 in 2026. The remaining $228,375 of building stays on the 27.5 year schedule. And with the April start, that's about $5,880 for 2026. Total first year depreciation, about $82,000. Without the study, we calculated $7,840. 82,000 versus 7,840. Same duplex. Same year. Same tax code. Now, two caveats because a big number without the rest of the story isn't worth much. First, whether you can use that deduction this year is the same passive loss question from the myths section. If real estate isn't your job and you don't qualify for one of the ways around the passive rules, a big chunk of that deduction may be suspended and carried forward. Know before you order a study, not after. I'll tell you if you talk to me. Second, what you accelerate comes back differently when you sell. Depreciation on the components a study carves out is generally taxed back at ordinary income, not at 25% cap on the building. For most buy and hold investors, that's still a good trade. And it gets better if you hold long term or exchange or leave the property to your heirs. Episode 17 about depreciation recapture is the full exit conversation. Listen to it before you do this, not after. And one note on timing, because of where we are on the calendar right now, an engineering-based study usually takes four to eight weeks from the time you engage to a delivered report, and that includes the in-person site visit. If you start one now, it's for your 2026 return. That's the right way to think about it this fall. Start now and it lands where it needs to. If you'd like to see what your own numbers would look like, I'll run a no-cost analysis on any rental or commercial property you own or even that you're looking at buying. No obligation, no sales pitch. And if a study won't pay for itself on your property, I'll tell you that. I'd rather tell you no today and talk to you about your next property than sell you something that doesn't make sense. You can book a time at my Calendly address, which is in the show notes, or call me. 770-224-8504 option two. It's all in the show notes anyway. Let me run through the questions I actually get asked about this. Short answers, there's a bunch of them. Can I depreciate a rental while I'm still fixing it up? No, not until it's ready and available for rent. The rehab costs go into your basis and the clock starts when it's ready. Do I keep depreciating when it's vacant between tenants? Yes. Temporarily idle property keeps depreciating. Does bonus depreciation apply to the building itself? No. Bonus depreciation reaches property with a recovery period of 20 years or less. A 27 and a half year building doesn't qualify. The components a study carves out into five, seven, or fifteen years do That's the entire reason. Cost segregation studies exist. I put up a new fence myself. Is that 27 and a half years? No. Fences, driveways, sidewalks, landscaping are generally all land improvements, which are 15-year property. If you paid for a specific one after you bought it, it goes on its own 15-year clock and it may qualify for bonus depreciation. How long do I keep my purchase records? The answer is longer than you'd think. You keep the records that support your basis for as long as you own the property. And then until the period for the IRS to review the return for the year you sell has passed. For most people, that means the settlement statement lives in the file cabinet for decades. Scan it. Can I choose a shorter schedule on my building because I'm going to sell it in five years? No. The recovery period is set by the tax code for the type of property, not by your plans. The way to speed things up legitimately is to identify the pieces that are really short-lived. Which is what a cost segregation study does. Can I just not take depreciation this year and double it next year? No. Depreciation is figured year by year. The allowable amount for this year counts against your basis, whether you claim it or not. What about furniture and a furnished rental? Five-year property under publication 527. And if it was acquired and placed in service after January 19th of 2025, it may qualify for 100% bonus depreciation on its own. No study needed. My tax professional set this up years ago. Should I just assume it's wrong? No, assume they built it from what they were handed. Ask for the depreciation schedule, check the land split and placed in service date against your own records, and bring them anything that's changed. Most of the time what's missing is information, not effort. Does depreciation hurt me when I apply for a mortgage? In episode 10, Ryan Bakke made the point that underwriters generally add depreciation back when they look at your rental income. Because it's a paper expense. Ask your lender to confirm how they treat it. What if I own the rental in an LLC? Same rules. The depreciation is calculated at the entity level and flows through to the owners the same way the rest of the income and loss does. What if I sell a property halfway through the year? The mid month convention works on the way out too. You get depreciation through the middle of the month you sell, and that's the moment your recapture math kicks in, which is episode 17. Is the $150,000 number you use as a rule? No, it's my rule of thumb for when a cost segregation study usually pays for itself, which I explained back in episode twenty. Below that, the math often doesn't work. Above it, it's worth running the numbers. Okay, let's make this something you can act on this week. Here's your playbook. Five steps in order, and you can get through the first four this week. Step one, write down two dates for every rental you own. The date the purchase contract became binding, or at least your closing date, and the date the property was placed in service, the day it was ready and available for rent. Don't skip that second date. If you closed in November and it sat empty until the rehab was done and a listing went up in March, those are different dates and both of them matter. Step two, find your cost basis and your land split. Pull your settlement statement for the price and the closing costs, then go to your county assessor's website. Look up the property and find the percentage of the assessed value that's land. Apply that percentage to what you paid. If you hit a wall on this one, just call me. I can help you figure it out quickly. Basis trips up more people than any other step here, especially when there have been improvements over the years or the land split was never done cleanly. I'll help you work it out and it won't cost you anything. Step three. List every improvement you've made since you bought the property. What it was, What it cost and the month it was finished. Roof, HVAC, windows, flooring, appliances. And if you replace something major, write down what came out because that's the partial asset disposition conversation. Step four ask your tax professional for the depreciation schedule on each rental and check it against steps one through three. Is the depreciation being taken every year? Does the building basis match your number? Does the start date match your placed in service date? If depreciation was missed for two or more years, ask about a Form 3115 catch up and go back and listen to episode 27 first so you know exactly what it is you're asking them for. And then step five. If the building basis on any property clears $150,000 and it's never had a cost segregation study done on it, book a no-cost analysis. There's a calendarly link in the show notes. Or call me at 770-224-8504-option two. Bring me the two dates and the basis from steps one and two, and I'll tell you within days whether a study makes sense, what it would cost, and what the estimated benefit looks like. And if it doesn't make sense, you'll hear that from me too. Depreciation is the quietest deduction on your return. It never costs you a check, and most rental owners never really look at it at all. That's exactly why it's worth 10 minutes this week. If this helped, send it to one rental owner you thought of during the myths. The newsletter is free and it gives you the playbook notes for this episode and the 2026-2027 tax planning guide at no charge. Sign up again at TaxstrategyPlaybook.com/newsletter newsletter and subscribe to the show, wherever you listen, because next week we're back in the R&D series with part two what happens to the credit when a customer is paying for the research. Nothing in this Episode is tax advice for your situation, the numbers are your numbers, and they need a professional who knows them. What I can do is make sure you walk into that conversation knowing exactly what to ask. Remember, tax evasion is a crime, but tax avoidance is mandatory. I'm David Wiener, Mr. Cashflow. I'll see you next Tuesday on the Tax Strategy Playbook.