Depreciation allows you to deduct a portion of the property’s value each year as a business expense, even if the property is actually appreciating. The IRS allows residential rental properties to be depreciated over 27.5 years. This annual deduction reduces taxable income and improves cash flow on paper. The tradeoff: depreciation is recaptured at a higher tax rate when you sell, unless you use a 1031 exchange to defer it. Understanding depreciation and its interaction with your overall tax situation is worth a conversation with your CPA annually.
