When you own a rental property, the IRS gives you a tool that many investors love: depreciation. It allows you to spread the cost of the property over its useful life, lowering the taxable income from your rentals. That means more money stays in your account instead of going straight to taxes..
Which Properties Qualify
▹ Residential Rentals
Houses, condos, and apartment units fall into this category. Depreciation runs over 27.5 years using the IRS system.
▹ Commercial Rentals
Office spaces, retail shops, or warehouses are depreciated over 39 years.
▹ Improvements
Permanent upgrades like landscaping, fences, driveways, or major renovations can also be depreciated. The timeline depends on the type of improvement.
▹ Furnishings and Appliances
Furniture, carpets, and appliances in furnished units are depreciated separately, usually over a shorter period. Land itself cannot be depreciated because it doesn’t wear out.
Timing Is Important
Depreciation starts the day your property is ready to rent. Placing it in service early in the year can give you a bigger deduction right away, helping with cash flow.
Getting More from Depreciation with Cost Segregation
A cost segregation study can make depreciation work even harder for you. It breaks down a property into components like electrical systems, plumbing, flooring, and specialized lighting, letting you depreciate some items over 5, 7, or 15 years instead of 27.5 or 39.
This can be especially useful if you bought a property with high construction costs, made big renovations, or acquired it from another owner. A proper study gives you documentation to stay compliant with the IRS while boosting your deductions.
Depreciation Recapture on Sale
When you sell a property, the IRS recaptures the depreciation deductions you claimed. This means the accumulated depreciation is taxed at a maximum rate of 25%, called unrecaptured Section 1250 gain. Any remaining profit beyond this is taxed at long-term capital gains rates, which are generally lower than ordinary income tax rates used during ownership.
Even with recapture, the net tax savings you enjoyed during ownership usually outweigh the tax paid at sale. Depreciation is still a powerful tool for building wealth with rental properties.
Advanced Strategies to Maximize Benefits
Investors often combine accelerated depreciation, cost segregation studies, and bonus depreciation to maximize early-year deductions. This boosts upfront cash flow and gives more money to reinvest. Recent changes like OBBBA in 2025 have made bonus depreciation even more beneficial for real estate owners.
Another strategy is a 1031 exchange. It lets you defer both capital gains and depreciation recapture taxes when you sell a property, allowing your money to keep working in the next investment property.
Why Depreciation Matters
For rental property owners, depreciation is more than just a tax write-off. It increases cash flow, reduces taxable income, and can be part of a larger strategy to build long-term wealth. Even with recapture at sale, the benefits over the holding period are significant, making depreciation an essential part of smart real estate investing.
Some IRS rules allow extra depreciation in the first year your property is in service. That can be a big help if you are reinvesting rental income into the property or other investments.
Working with a Houston CPA or Deer Park CPA makes a big difference. They can make sure you are taking full advantage of depreciation and cost segregation without running into IRS issues. Proper planning keeps your rental income working for you rather than going to taxes.
Owning rental properties in Texas comes with opportunities and rules. Knowing how to leverage depreciation can improve your cash flow, lower taxes, and give you a clearer picture of your real estate business.
