At 72 He’s Planning to Own Four Rentals and Collect $56,000 a Year in Rent. Depreciation Wipes Out Most of the Taxable Part, and It Has Every Year Since He Bought Them
A retiree collecting rent from four properties has legally erased most of his taxable income for over a decade, and the same tax code provision that makes it possible also hides a future bill most landlords never see coming.
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Rental property depreciation is a paper expense that lets owners deduct part of a building’s cost yearly, even as the property gains value. No cash leaves the account, yet the deduction offsets rental income on your return. A landlord with several properties can use it to shelter most rent from federal income tax, year after year.
A Deduction That Costs Nothing Out of Pocket
Take a 72-year-old retiree who has four single-family rentals bought between 2009 and 2016, each for $200,000. Together, they generate $56,000 in annual rent. After property taxes, insurance, repairs, and management fees of about $22,000, net rent is $34,000 before depreciation.
Land can’t be depreciated, only the building. If land is 20% of each purchase, each house has a $160,000 building basis. Spread over 27.5 years, that’s $5,818 per house, or $23,273 across all four. Taxable rental income drops to $10,727, so depreciation shelters about 68% of net rent annually.
Where the Tax Code Spells It Out
As far as the tax code goes, Section 167 of the Internal Revenue Code allows depreciation deductions for income-producing property. Section 168 sets the timeline: residential rental property depreciates over 27.5 years using the straight-line method and a mid-month convention. Under that convention, the first year counts as a partial year based on the month the property is ready to rent. IRS Publication 527 provides details.
Section 469 controls what happens when depreciation drives results below zero. Rental losses can usually offset only other passive income. Owners who actively participate can deduct up to $25,000 of rental losses against other income, phasing out as modified adjusted gross income rises from $100,000 to $150,000. You can carry forward losses you can’t deduct to future years. See IRS Publication 925.
Who Can Claim It and Who Can’t
Any owner of a residential building rented for income qualifies, including retirees on Social Security and investment income. A personal residence doesn’t qualify, and land under any rental never does. Retirees with modest income often stay below the $100,000 threshold, keeping the full loss allowance available.
How to Put Depreciation to Work
- Split the purchase price between land and building using county assessor ratios or an appraisal. Closing costs add to your basis.
- Divide the building basis by 27.5 for the full-year deduction, then apply the mid-month convention to the first and last years.
- Report rental income, expenses, and depreciation on Schedule E. Attach Form 4562 the first year a property is placed in service.
- Treat capital improvements as separate assets with their own 27.5-year schedules.
- File Form 8582 when passive loss limits apply and track carried-forward losses yearly.
A Recapture Bill Waits for You at Sale
Each year of depreciation lowers the property’s basis, and the IRS collects at sale. The gain from depreciation counts as unrecaptured Section 1250 gain, taxed at up to 25%. By the end of 2025, the 2009 house would have about $98,909 of depreciation on the books, exposing up to $24,727 in federal tax at that rate.
Owners who never claimed the deduction still owe recapture tax. Basis drops by depreciation “allowed or allowable,” so the IRS taxes depreciation you were entitled to take even if it never appeared on a return. Rising home values also increase the total gain. The Case-Shiller National Home Price Index stood at 337.3 in July 2026, up 1.9% from a year earlier.
Every building’s tax shelter eventually runs out. The 2009 house ends its schedule around 2036, when the owner turns 82. After that, taxable rent from that property rises by the full $5,818 yearly. The other three houses follow on their own timelines. Map out when each building’s deduction ends to plan for the higher tax bill that follows.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
