Form 4562: Depreciation for Rental Property

How to claim depreciation on your rental property and why it matters for your taxes

What Is Depreciation?

The IRS lets you deduct the cost of your rental property over time, recognizing that buildings wear out. This deduction—called depreciation—reduces your taxable rental income each year, which means you pay less in taxes.

Depreciation is not optional. The IRS requires you to take it, whether you claim it on your return or not. If you sell the property later, the IRS calculates recapture as if you had been claiming it all along. Always take the deduction.

Depreciation is reported on IRS Form 4562 and flows into Schedule E, where you report all your rental income and expenses.

The 27.5-Year Rule

Residential rental property is depreciated over 27.5 years using the Modified Accelerated Cost Recovery System (MACRS). This is the standard method the IRS requires for residential rentals.

You depreciate the building, not the land. Land does not wear out, so the IRS does not let you depreciate it. You need to separate your property's cost into a building portion and a land portion.

For example, say you bought a rental property for $200,000. Your county assessment shows 20% of the value is land. That gives you:

  • Land value: $40,000 (not depreciable)
  • Building value: $160,000 (your depreciable basis)
  • Annual depreciation: $160,000 / 27.5 = roughly $5,818 per year

That $5,818 deduction comes off your rental income every year for 27.5 years—even though you did not spend any additional cash. It is one of the biggest tax advantages of owning rental property.

What Qualifies for Depreciation?

The building itself is the largest depreciable asset, but it is not the only one. Capital improvements—significant upgrades that extend the life or value of your property—are also depreciated over time.

Common depreciable improvements include:

  • A new roof or major roof repair
  • HVAC system replacement
  • Appliances (if they cost enough to qualify as assets rather than expenses)
  • Kitchen or bathroom renovations
  • New flooring, windows, or siding
  • Additions or structural changes

Not everything is depreciated, though. Ordinary repairs are deducted immediately on Schedule E in the year you pay for them. The difference matters:

  • Repair (deduct now): Fixing a leaky faucet, patching drywall, replacing a broken window pane
  • Improvement (depreciate over time): Replacing all the plumbing, installing new drywall throughout, replacing every window in the unit

The general rule: if it restores the property to its original condition, it is a repair. If it makes the property better, longer-lasting, or adapts it to a new use, it is an improvement. For more on deductible expenses, see our guide on landlord tax deductions.

How to Fill Out Form 4562

Form 4562 has six parts, but most landlords only need to worry about Part III: MACRS Depreciation. This is where you list each depreciable asset, its cost basis, the date you placed it in service, and the recovery period (27.5 years for the building, shorter periods for appliances and other personal property).

For each asset, you will enter:

  • Description of the property (for example, "residential rental building")
  • Date placed in service (when the property was available for rent)
  • Cost or other basis (the depreciable portion, excluding land)
  • Recovery period (27.5 years for residential rental buildings, 5 or 7 years for appliances and fixtures)
  • Depreciation deduction for the current year

The total depreciation from Form 4562 carries over to Schedule E, Line 18, where it reduces your net rental income.

If you placed no new assets in service during the tax year and are only continuing to depreciate existing assets, you may not need to file Form 4562 at all—you can report the depreciation directly on Schedule E. Check with your accountant if you are unsure.

How ValleyUnit Handles Depreciation

Tracking depreciation by hand means maintaining spreadsheets, remembering placed-in-service dates, and calculating partial-year conventions. ValleyUnit handles all of it.

With ValleyUnit's Pro plan, you can:

  • Add depreciable assets to any property (the building, appliances, improvements)
  • Enter the cost basis and land value—ValleyUnit calculates the depreciable portion
  • Set the placed-in-service date for each asset
  • View a complete depreciation schedule showing the annual deduction for every asset

ValleyUnit calculates annual depreciation using MACRS rules, including the mid-month convention for real property. The depreciation schedule is ready to hand to your accountant or use directly when completing Form 4562.

Explore all available tools on our Features page, or compare plans on our Pricing page to find the right fit.

Stop tracking depreciation in spreadsheets

ValleyUnit calculates MACRS depreciation for every asset and generates your Form 4562 data automatically.

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