Rental property depreciation: the records it actually needs

Depreciation is the part of a rental return most owners hand to a preparer, and that is a reasonable division of labour. But the preparer cannot invent what you did not write down. Almost every depreciation problem an owner runs into is a records problem that surfaced years later: a purchase price never split between land and building, a boiler and a building and a refrigerator all in one number, a date nobody can pin down.

Nothing here works out a depreciation figure, and neither does HomeBasisLedger. Recovery periods, methods, conventions and elections are your tax professional’s work. What follows is the file they need in front of them.

One number is not a depreciation record

The common mistake is not a wrong number. It is a single number: the whole property, one price, one line, with everything bought since added on top. But the tax code does not treat a building and a dishwasher as the same asset. Residential rental buildings and their structural components — the furnace, the water pipes, the venting — sit in a 27.5-year class under the general depreciation system, while appliances, carpeting and furniture used in a residential rental activity sit in a 5-year class (Publication 527).

So a $900 appliance folded into the building total is not a rounding error: it has been given a recovery period more than five times as long as the one its own class carries. That is a simplified and hypothetical illustration — your own facts, method and elections decide the real answer — but the shape of the error is real, and separating costs as you incur them is minutes of work against a later guess.

The classes a rental actually meets

A residential landlord meets a small number of categories, over and over. You do not have to assign them yourself; the point is to record enough detail that somebody can. These are the ones described in Publication 527 and Publication 946:

• The building and its structural components — 27.5-year property under GDS, and Publication 527 puts structural components such as furnaces, water pipes and venting in the same class. “Residential” is a defined term: broadly, 80% or more of the building’s gross rental income for the year has to come from dwelling units, so a building with shops underneath the apartments may not qualify.
• Land improvements — the 15-year class. Publication 527 describes it as roads, fences and shrubbery where those are depreciable at all; Publication 946 puts it as improvements made directly to land or added to it, and adds sidewalks and bridges. Publication 527 lists a driveway and a retaining wall as improvements, but neither publication says whether they land in this class or with the building.
• Appliances, carpeting and furniture — 5-year property when used in a residential rental real estate activity, and the class most often lost inside a building total.
• Office furniture and equipment — 7-year property: desks, filing cabinets and the like. Easy to misfile, because it feels like running the business rather than an asset.
• Land — not depreciated at all. Publication 946 is blunt about the reason: land does not wear out, become obsolete or get used up.

There is also a second system, ADS, which some owners must or may use. Under it the recovery period for residential rental property is 30 years for property placed in service after 2017 and 40 years for earlier property — with an exception in Publication 527 that puts some pre-2018 property on 30 years as well, where it is held by an electing real property trade or business. Record which system a property is on: it is not visible in the invoices, and Publication 946 says an election to use ADS can never be revoked once made.

Land, and a split that lasts forever

Land is never depreciated, so the purchase price has to be divided between land and building before anything else can happen. That split is made once and follows the property for as long as you own it. Publication 527 offers a workable method where fair market values are not clear: divide the cost between them based on their assessed values for real estate tax purposes. An appraisal that separates the two, or the assessor’s own breakdown for the year you bought, is trivial to save now and awkward to obtain in fifteen years.

Record the split as two numbers and the source you used, not as a percentage you remember agreeing to. “Land $88,000, building $272,000, per the 2019 county assessment” is a record. “About a quarter land” is a recollection, and a recollection is not something you can put in front of anyone fifteen years later.

If the property came to you some other way — converted from your own home, inherited, or received as a gift — the starting figure is not simply what you paid. For a conversion, Publication 527 sets the basis for depreciation at the lesser of adjusted basis or fair market value at the time of the change, so the file needs both, and the evidence of value has to be gathered then. Nobody can appraise a past Tuesday. Converting a home has its own article.

Placed in service is its own date

The date depreciation starts is not the date you closed, not the date you signed a lease, and not the date the first rent landed. Property is placed in service when it is ready and available for its specific use — and Publication 946 is explicit that it counts as in service when it is ready and available even if you are not yet using it.

Every item added later carries its own such date: a new roof, a new furnace and a new washing machine each start their own clock rather than the building’s. The date also drives the convention applied to the asset — residential rental real property uses a mid-month convention, while personal property such as appliances follows a half-year or mid-quarter convention. You do not need to work that out. You do need the date, per asset, because nobody can reconstruct it from a total.

The parts that are genuinely arguable

Repair or improvement is the big one. On a rental the stakes run the opposite way from an owner-occupied home: a repair is generally deductible against this year’s rental income, while an improvement must be capitalised and recovered over its recovery period. Publication 527 frames the test as betterment, restoration or adaptation. The underlying question has its own article.

A roof shows how much room that leaves. Publication 527’s table of example improvements lists a new roof, and a full tear-off and replacement often reads as a restoration; patching a section after ordinary wear generally does not. Storm damage is its own wrinkle, because Publication 527 puts a repair made after you have properly adjusted basis for a casualty loss on the restoration side — the same patch can land differently depending on whether a loss was claimed. So the invoice has to describe what was actually done, not just say “roof, $14,400”.

There are also safe harbors that can settle some of these without an argument: a de minimis election (broadly $2,500 per invoice or item without an applicable financial statement, $5,000 with one), a routine maintenance safe harbor, and one for smaller taxpayers on buildings of modest basis (the tangible property regulations). Each carries conditions, so they are something to raise with your preparer — and a reason to keep invoices itemised, since a safe harbor applied per invoice or per item is only as good as your paperwork.

Landscaping is the other reliable trap. Some of it is non-depreciable land cost and some of it is depreciable. Publication 946 draws the line by association with the building: planting close enough that replacing the building would destroy it has a determinable useful life, and can be depreciated on that reasoning. A row of trees at the boundary generally does not. So a note of where the planting went is worth more later than the total on the landscaper’s bill.

What to keep

Depreciation records are cumulative in a way most tax records are not, and the figure that counts is depreciation allowed or allowable — broadly, what you deducted or could have deducted — which is why the paper trail has to survive the whole hold, not the usual three-year mark. What it does to your basis when you sell is a separate article. Per property, keep:

• The closing documents and whatever supports the land and building split — appraisal, assessment notice, or the allocation your preparer used, with the year it came from
• The placed-in-service date for the property, and the basis figure used at that point — including, for a converted home, both the adjusted basis and the evidence of value on the day it changed use
• Every capital item as its own line: what it was, the date it was ready for use, the amount, and the class you and your preparer concluded it belongs to
• Itemised invoices that describe the work, not just the total — the description is what decides betterment, and the same invoice may need to be split between a repair and an improvement
• The depreciation schedule itself, year by year: amounts taken, the method and system used, and any elections made. This is the one owners assume their preparer keeps forever, and preparers change
• Rent received and operating expenses by Schedule E line, with security deposits held separately — a deposit used as the final rent payment is advance rent, which Publication 527 says to include in income in the year you receive it, and it is not the only way a deposit turns into income. Deposits have their own article.
• Any period the property was not available for rent, and any personal use, since both affect the treatment for that stretch

Most of that list is what HomeBasisLedger’s Investor add-on is for, on a property you have marked as a rental or investment: rent and deposits kept apart, expenses tagged to Schedule E lines, improvements grouped by the depreciation class you and your preparer concluded, and land value and placed-in-service date recorded against the property. It produces a file per tax year listing every Schedule E expense line but one, zeros included. The depreciation schedule itself, and your record of when the property was off the rental market, sit outside it — keep those in your own file alongside.

The line it leaves out is 18, Depreciation expense or depletion. That one is deliberately absent from every report, because the add-on does not compute depreciation: the number is your preparer’s, and it is theirs to sign.