Legal & TaxQuestion 59
How Does Depreciation Work for Houston Rental Properties?
The IRS allows you to depreciate the building (not land) portion of a rental property over 27.5 years, creating a paper loss that reduces your taxable rental income.
Depreciation is the single most powerful tax benefit of owning rental property, and it works the same in Houston as anywhere in the U.S.
- How it works: Divide the building's cost basis by 27.5 years. You deduct that amount annually from your rental income.
- Example: Buy a Houston property for $250,000, land value $50,000. Building value = $200,000 / 27.5 = $7,273/year in depreciation deductions.
- Cost segregation: An advanced strategy where a specialist reclassifies building components (appliances, carpet, landscaping) into 5, 7, or 15-year depreciation schedules, accelerating deductions.
- Depreciation recapture: When you sell, the IRS recaptures depreciation at a 25% tax rate. A 1031 exchange can defer this indefinitely.
Bottom Line
Depreciation often makes Houston rental income tax-free on paper while you still collect positive cash flow. Consider cost segregation studies for properties valued over $300K to front-load deductions.