Depreciation and cost segregation for rental property
Depreciation lets you deduct the cost of a building over time even while it rises in value. Cost segregation moves part of it into the first year. Here is how both work, and where they go wrong.
Prepared by Prem Tax and Accounting Corp. Last checked against official sources on October 9, 2026.
How depreciation works
- Residential rental building: 27.5 years, straight line. Commercial buildings: 39 years.
- Mid-month convention: you get half a month of depreciation in the month you start, which makes the first year smaller.
- What is in the cost: the purchase price plus closing costs that belong to the property (title, legal, recording, transfer taxes), plus later improvements. Loan costs are handled separately.
- Land is excluded. Typical land allocations are 15% to 30%, but your own numbers should come from the assessor or an appraisal.
- Allowed or allowable: the IRS counts the depreciation you were entitled to claim, even if you did not claim it.
Recovery periods by type of property
| Type | Years | Examples |
|---|---|---|
| Residential rental building | 27.5 | Houses, duplexes, apartment buildings |
| Commercial building | 39 | Offices, retail, warehouses |
| 5-year property | 5 | Appliances, carpeting, furniture |
| 7-year property | 7 | Office furniture and equipment |
| 15-year property | 15 | Roads, fences, shrubbery and other land improvements |
Cost segregation and 100% bonus depreciation
A cost segregation study identifies the parts of a building that are not "building" for tax purposes, like flooring, appliances, cabinetry, fixtures and land improvements, and assigns them 5-, 7- or 15-year lives. Since the 2025 tax law, 100% bonus depreciation is permanent for qualifying property acquired after January 19, 2025, so those parts can be deducted in the first year.
| Regular | With cost segregation | |
|---|---|---|
| Building (27.5 years) | All of the cost | The rest of the cost |
| 5-, 7- and 15-year parts | Inside the building | Deducted in year one with 100% bonus |
| Total deductions over time | The same | The same, but earlier |
Before you order a study
- Can you use the loss? A big first-year loss is useful only if passive rules, income limits and the business loss limit let you use it. See passive losses.
- What happens when you sell? The accelerated parts are recaptured as ordinary income, up to the depreciation taken. See selling.
- What does your state do? Illinois adds back federal bonus depreciation and subtracts it later.
- Is the study quality high? Choose an experienced engineering-based provider. We can coordinate.
Try the depreciation calculator to compare regular depreciation with a cost segregation scenario.
Common questions
Can I depreciate the land?
No. Land does not wear out, so only the building and other improvements are depreciated. Split the purchase price between land and building using the county assessor's ratio or an appraisal.
When does depreciation start?
When the property is ready and available to rent (placed in service), not necessarily the day you buy it. If you renovate first, it starts when the unit is ready for tenants.
I never claimed depreciation. What do I do?
You can usually claim all of the missed depreciation in a single year by filing Form 3115 (a change in accounting method) with your return. You generally do not amend each old return. The IRS treats depreciation as taken whether or not you claimed it.
Does 100% bonus depreciation apply to the building?
No. The building structure (27.5 or 39 years) does not qualify. Bonus depreciation applies to property with a recovery period of 20 years or less, such as appliances, carpet, land improvements and some interior improvements, which is why a cost segregation study matters.
Is a cost segregation study worth it?
It depends on the size of the property, whether you can use the large first-year loss (passive rules), how long you will hold it, and your state. The tax benefit comes earlier but the accelerated parts are recaptured as ordinary income on sale. We run the numbers before you pay for a study.
Does Illinois allow bonus depreciation?
Illinois requires an addback of federal bonus depreciation (Form IL-4562) and gives a subtraction in later years, so the Illinois benefit is spread out. The rules for recent years have changed, and we check them each year.
Official sources
- IRS Publication 527: Residential rental property
- IRS Publication 946: How to depreciate property
- IRS Notice 2026-11: 100% bonus depreciation
- Illinois: Form IL-4562 instructions
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