Rental Property Depreciation: The IRS 27.5-Year Rule for Tennessee Investors

Rental property depreciation is the federal tax deduction that lets an investor recover the cost of a rental building a little at a time, year by year, rather than all at once. For Tennessee investors who own or are buying a single-family rental or a small multifamily property, it can be a significant deduction, and it follows a fixed schedule set by the Internal Revenue Service.

This guide summarizes how IRS Publication 527, Residential Rental Property, describes the rules. It is general information, not tax advice. Investors should review their own situation with a tax professional.

What rental property can be depreciated?

According to the IRS, property can be depreciated if the investor owns it, uses it in an income-producing activity such as a rental, it has a determinable useful life, and it is expected to last more than one year. An owner is still considered the owner for this purpose even if the property is subject to a mortgage.

Land is the major exception. The IRS says land cannot be depreciated because it generally does not wear out, become obsolete or get used up, and the costs of clearing, grading, planting and landscaping are usually treated as part of the land. When a purchase price covers both the building and the lot, Publication 527 says the cost must be divided between them based on their fair market values; if those values are uncertain, the investor can use the assessed values on the real estate tax assessment to split the cost.

How does rental property depreciation work over 27.5 years?

Residential rental property placed in service after 1986 is generally depreciated under the Modified Accelerated Cost Recovery System, known as MACRS. Under its General Depreciation System, a rental building and its structural components, such as furnaces and water pipes, are recovered over 27.5 years using the straight-line method, which spreads the deduction evenly. The IRS requires a mid-month convention for residential rental property, which treats the property as placed in service at the midpoint of the month it became available.

Not everything inside a rental follows the 27.5-year schedule. Publication 527 assigns shorter recovery periods to some items used in a rental activity:

Item	IRS recovery period (General Depreciation System)
Rental building and structural components	27.5 years
Appliances, carpets and furniture used in the rental	5 years
Fences, roads and depreciable shrubbery	15 years
Additions and improvements, such as a new roof	Same period as the property improved

Source: IRS Publication 527 (2025), Table 2-1.

Investors can elect the Alternative Depreciation System instead, which uses a 30-year straight-line period for residential rental property placed in service after 2017. The IRS says that election must be made in the first year the property is placed in service and cannot be revoked.

When does depreciation start, and what goes into basis?

Depreciation begins when the property is placed in service, which the IRS defines as the date it is ready and available for rent, even if no tenant has moved in yet. For investors who buy a house and renovate it before renting, as in the approach described in Iron Hill Brief's guide to the BRRRR method in Tennessee, the clock generally starts when the work is finished and the home is offered for rent, not on the purchase date.

The amount being depreciated, called basis, is usually the cost of the property. Publication 527 lists settlement costs that are added to basis, including abstract fees, legal fees, recording fees, surveys, transfer taxes and title insurance. Costs tied to getting the loan, such as points, credit report fees and lender-required appraisal fees, are not added to basis, according to the IRS. Improvements made later are generally capitalized and depreciated as separate items, while ordinary repairs may be deducted in the year they are paid.

Depreciation also matters at the end of ownership. The IRS says depreciation reduces the property's basis for figuring gain or loss on a later sale, and that the basis must be reduced by the depreciation the owner was entitled to take, even if it was never claimed. Investors weighing a future exchange can review Iron Hill Brief's guide to the 1031 exchange in Tennessee. Overview details on DSCR loans cover how rental property financing is evaluated; requirements vary by lender.

Frequently asked questions

Can I depreciate the land under my rental house? No. The IRS says land is not depreciable. Only the building and other qualifying property can be depreciated, so the purchase price has to be split between the land and the building.

Does depreciation start on the day I close? Not necessarily. Under IRS rules, depreciation begins when the property is ready and available for rent. A home that needs work before it can be rented is generally placed in service once it is ready and offered to tenants.

What happens if I forget to claim depreciation? The IRS says basis is reduced by the depreciation allowed or allowable, so skipped depreciation can still reduce basis. Publication 527 describes amended returns or an accounting-method change as possible ways to correct it; a tax professional can advise on which applies.

Working on a Tennessee rental? Talk with an Iron Hill loan advisor: text Ashley at 615-949-4780 or book a time here. Iron Hill Mortgage | NMLS #1946451.

Business-purpose loans for investment property only. Not for personal, family or household use. Subject to approval. Equal Housing Opportunity.

Sources

• Internal Revenue Service, Publication 527 (2025), Residential Rental Property (chapter 1, rental expenses; chapter 2, depreciation of rental property, Table 2-1 MACRS recovery periods; accessed Oct. 23, 2026): https://www.irs.gov/publications/p527