Depreciation is the deduction you take now and settle later

Depreciation lets an owner deduct the cost of the building — not the land — over a fixed recovery period. For residential rental property that is 27.5 years; for commercial, 39. It is a paper deduction: no cash leaves the owner's hands, and it is often what makes a property that produces real cash flow show a small taxable profit or a loss. The part people do not expect is the settlement. When the property is sold, the depreciation taken is recaptured and taxed, at its own rate, separately from the capital gain on the rest of the appreciation. And a rule that surprises everyone: recapture is computed on depreciation "allowed or allowable". An owner who never claimed it is still taxed as if they had. Skipping the deduction does not avoid the bill; it just forfeits the benefit and keeps the cost. Two practical consequences. First, the land allocation matters — the portion of the purchase price assigned to land is not depreciable, and an allocation pulled out of the air is an audit question. The county's assessed split is the usual starting point. Second, this is why a 1031 exchange and a long hold are natural partners for a depreciating asset: the recapture follows the owner until a sale actually happens. The practical step is not "should I depreciate" — it is not optional in any useful sense. It is making sure the basis, the land split and the improvements placed in service are recorded correctly from year one, because fixing them later is a bigger job than doing them right. This article is general information, not legal, tax or financial advice. Rules change and every deal is different — check your own case with a licensed professional. Alberto Zaltzberg — Adonait · adonait.com