27.5 Year (Residential)

The Land Exclusion: Establishing Your Depreciable Basis

The most common mistake new rental property owners make is attempting to depreciate the full purchase price of their property. Land is not depreciable — it has no finite useful life — and must be excluded from the depreciable basis before any 27.5-year calculation begins. For a property purchased for $400,000, the IRS requires allocating a portion to land value, with only the building's value entering the depreciation schedule. Common allocation methods include: using the county assessor's ratio of land to improvement value from the property tax assessment; obtaining a separate appraisal; or using the purchase price allocation if land was separately identified in the closing statement. If the assessor's records show land at 25% of assessed value, a $400,000 purchase produces a $300,000 depreciable basis — generating $10,909 per year ($300,000 ÷ 27.5). Misallocating even $50,000 of land to building value overstates annual depreciation by $1,818 and can trigger recapture on sale.

How the Mid-Month Convention Works for Residential Real Property

Unlike personal property's half-year convention, residential rental property uses the mid-month convention. The asset is treated as placed in service at the midpoint of the month it was actually placed in service, regardless of the exact date. A property closed on March 7 is treated as placed in service on March 15 — earning 9.5 months of depreciation in year one (half of March = 0.5 months + April through December = 9 months). A property closed on March 25 also earns 9.5 months — the exact day within the month does not matter once mid-month applies. The first-year deduction formula is: (Depreciable Basis ÷ 27.5) × (Months in Service ÷ 12). For a $300,000 building placed in service in March: ($300,000 ÷ 27.5) × (9.5 ÷ 12) = $10,909 × 0.7917 = $8,636 in year one. All subsequent full years claim $10,909, and the final year claims the remaining balance to complete cost recovery.

Cost Segregation: Accelerating Components Within the 27.5-Year Shell

While the building structure is locked into 27.5-year straight-line, a cost segregation study can identify building components that qualify as personal property (5-year or 7-year) or land improvements (15-year), accelerating deductions on those components dramatically. For a residential rental building, qualifying short-life assets typically include: carpet and vinyl flooring (5 years), window treatments and blinds (5 years), appliances and laundry equipment (5 years), decorative lighting and specialty wiring (5-7 years), landscaping and parking lot paving (15 years), and certain site improvements. On a $500,000 apartment building acquisition, a cost segregation study typically reclassifies 15–25% of building cost — $75,000 to $125,000 — into shorter recovery periods. That reclassification converts $75,000 of 27.5-year property (generating $2,727/year) into 5-year property generating $15,000 in year one alone. The cost of a cost segregation study ($3,000–$10,000 for a typical residential property) typically pays back within the first tax filing year for properties valued above $500,000.