Many clients hear the word “depreciation” and assume it’s too technical or confusing to understand. But as a real estate agent, you know that depreciation is one of the most powerful tax tools available to real estate investors—and understanding it can mean thousands of dollars in annual savings.
Helping clients make sense of this concept isn’t just good service—it also positions you as a savvy, educated professional. If you’re brushing up on your knowledge through real estate continuing education, this is a topic you’ll encounter frequently in real estate CE courses, especially those focused on tax strategies and investment properties.
What Is Depreciation?
At its core, depreciation is a tax deduction that allows rental property owners to recover the cost of the building over time. Think of it as the IRS acknowledging that buildings wear out—and allowing you to deduct a portion of that cost each year.
Under current U.S. tax law, the IRS requires residential rental properties to be depreciated over 27.5 years using the MACRS (Modified Accelerated Cost Recovery System) straight-line method. That means the deduction is spread out evenly across that period.
Quick Math:
If the value of the structure (excluding land) is $275,000, the annual depreciation deduction would be approximately $10,000 per year.
$275,000 ÷ 27.5 = $10,000 per year
This deduction happens regardless of the property’s market value. Even if the property appreciates, the depreciation deduction remains the same year after year.
What Can Be Depreciated?
Only the structure and certain improvements or personal property can be depreciated—not the land. That’s because land doesn’t “wear out” in the eyes of the IRS.
Depreciable property includes:
- The rental house or building (excluding land)
- Renovations or additions (e.g., adding a garage or finished basement)
- Appliances (typically depreciated over 5 years)
- Carpeting and furniture used in the rental (5–7 years)
- Fences, roofs, HVAC systems (usually depreciated over 27.5 years if part of the structure)
When you help a client close on an investment property, they’ll need to allocate the purchase price between land and building to calculate depreciation. This can often be estimated using local property tax assessments or an appraisal that breaks out the values.
Who Qualifies to Claim Depreciation?
Not everyone can claim depreciation—there are specific criteria:
- Ownership: Your client must own the property, either entirely or in part. Leaseholders cannot claim depreciation.
- Rental Use: The property must be used for income-producing purposes, i.e., it’s rented out or available for rent.
- Useful Life: The property must be expected to last more than one year (which it almost always does).
- Placed in Service: Depreciation starts when the property is ready and available for rent—even if it hasn’t yet been occupied.
Example: If your client buys a home in May and spends June renovating it, making it available for rent on July 1, then depreciation starts in July, not May. The IRS uses a mid-month convention, meaning the property is treated as “in service” halfway through the month it becomes available.
Why Depreciation Matters So Much
Here’s the magic: Depreciation is a non-cash deduction. That means your client doesn’t need to spend money each year to claim it. Unlike repairs or mortgage interest, which require actual payment, depreciation is purely based on the original cost.
This can reduce taxable income significantly—and, in many cases, result in a paper loss for tax purposes even if the property earns positive cash flow.
Example:
• Rental Income: $24,000
• Deductible Expenses: $8,000 (mortgage interest, taxes, repairs)
• Depreciation: $10,000
• Taxable Income: $6,000
However, if the client had $10,000 in depreciation, their taxable rental income might drop to $0, saving them hundreds (or thousands) in income tax.
Understanding this benefit is why many seasoned professionals keep their skills fresh with online real estate CE focused on investor strategy. It's also a great talking point for agents seeking to work more with real estate investors or aspiring landlords.
How to Explain Depreciation to Clients
Let’s face it—most clients don’t speak IRS. So here’s a metaphor that works:
“Think of your rental house like a loaf of bread. You can’t eat the whole thing at once. You slice off a piece each year. Depreciation works the same way—you get a little tax break each year until the loaf is gone.”
Another helpful analogy:
“The IRS assumes your rental building will wear out after 27.5 years—even if it doesn’t. So they let you deduct part of it each year to account for that slow wear and tear.”
These visuals make the concept approachable and give clients a reason to appreciate the long-term tax advantages of holding rental property.
What Happens If They Sell?
There is one important caveat to depreciation: when the property is sold, the IRS requires depreciation recapture. This means any depreciation your client claimed (or should have claimed) is “recaptured” and taxed at a special 25% rate.
This doesn’t erase the benefit of depreciation—it just means some of those tax savings come due at the sale. But if your client plans to 1031 exchange into another investment property, that recapture can often be deferred.
This topic is commonly reviewed in real estate license renewal courses because it's so central to helping clients understand both the short- and long-term tax implications of their investment decisions.
Why Every Landlord Should Be Depreciating
Surprisingly, some new landlords don’t claim depreciation because they think it’s optional or they don’t know how. But here’s the kicker: the IRS assumes you’ve been taking it.
If your client sells the property and hasn’t been claiming depreciation, the IRS still recaptures it—meaning they’ll pay tax on a benefit they didn’t even use.
Yikes.
That’s why it’s so important to help clients understand this concept early. You can also recommend they work with a tax professional to set up a depreciation schedule after purchase or when they convert a personal home to rental use.
A Bonus Tip: Improvements vs. Repairs
If your client upgrades the property—like replacing the roof or adding a new deck—that cost gets added to the depreciation schedule. This is different from a simple repair (like patching shingles), which is deductible right away.
So when clients make big updates, they’ll want to track those costs. Improvements can be depreciated, while repairs are current-year deductions. It’s one of those finer points covered in depth in continuing education for real estate agents, particularly tax-focused or investment-focused CE.
Final Thoughts
Depreciation is one of the most underutilized yet impactful tax benefits in real estate. As an agent, knowing the basics—and being able to explain them clearly—can elevate your value to investor clients.
It also makes a great topic to explore in your next affordable real estate CE online session. Whether you're helping new landlords get started or brushing up your own knowledge, understanding depreciation is essential for long-term real estate success.
To Learn More...
For real estate professionals, understanding these concepts can be particularly valuable during discussions with clients about why REALTORS® and real estate agents are knowledgable professionals.
If you’re preparing for your Real Estate Continuing Education or looking to enhance your knowledge through a Real Estate Course, topics like tax benefits of residential rental property can help set you apart.
As part of your License Renewal Course or other Real Estate CE efforts, staying informed on foundational property concepts can make a big difference in your expertise and client relationships.