What Landlords Need to Know About Depreciation and Property Value

Key Takeaways

• Depreciation strengthens long‑term returns by reducing taxable income each year, improving after‑tax cash flow without requiring additional spending.
• IRS depreciation rules create predictable, steady deductions over a 27.5‑year schedule, giving Cincinnati landlords reliable tax benefits as rents rise.
• Depreciation recapture can affect your net proceeds at sale, making it important to plan ahead so the long‑term tax impact doesn’t erode gains.
• Tools like 1031 exchanges allow investors to defer both capital gains and recapture, helping them preserve equity and continue growing their portfolio.

Owning rental property in Greater Cincinnati is a long-term strategy built on cash flow, appreciation and stability. One of the most effective tools for improving returns doesn’t appear on rent rolls or listing photos.

It’s called depreciation.

When used correctly, depreciation lowers annual tax liability and boosts after-tax cash flow; when misunderstood, it can create surprises at sale. Understanding how it works is essential for landlords who want to grow strategically, not accidentally.

At EquityTeam, we’ve prepared a guide that explains how rental property depreciation works, how it applies to Greater Cincinnati rentals and how investors use it as part of a long-term ownership strategy.

What Depreciation Really Means for Rental Owners

In everyday language, depreciation describes the gradual wear and aging of a physical asset. From the IRS’s perspective, rental property is no different from machinery or equipment. It has a “useful life” that declines over time, even if the market value rises.

For landlords, this creates an interesting paradox. Your Cincinnati rental may appreciate in value due to neighborhood growth, rising rents or strong demand, yet the IRS still allows you to deduct a portion of the building’s value each year as if it were wearing out. That deduction exists to reflect long-term usage, not market pricing.

Beyond tax depreciation, economic depreciation reflects how external forces, such as interest rates, employment shifts or housing cycles, affect property value. While the IRS doesn’t adjust depreciation for market swings, these factors still shape investment strategy and exit timing.

How Rental Property Depreciation Works in Practice

The IRS requires rental property costs to be deducted gradually, not all at once, over a defined recovery period. Residential rentals depreciate over 27.5 years, with deductions applied only to the building, since land is not depreciable.

In Greater Cincinnati, this applies equally to historic homes and newer builds. The property’s age doesn’t matter. Depreciation is based on cost basis and the date the property is placed into rental service.

Understanding the Depreciation Recovery Period

The recovery period reflects how long the IRS expects an asset to deliver economic value. Residential rentals depreciate over 27.5 years, commercial properties over 39 years, while items like equipment or furnishings use shorter schedules.

This extended timeline makes real estate unique, offering Cincinnati landlords steady, predictable deductions that help smooth taxable income as rents rise.

How Annual Depreciation Is Calculated

Depreciation starts with the purchase price, minus the value of the land, since only the building is depreciable.

For example, a buying $300,000 Cincinnati rental with $60,000 allocated to land leaves a $240,000 depreciable basis. Spread over 27.5 years, that equals roughly $8,727 in annual depreciation.

This deduction applies each year the property is in service, with adjustments for improvements and partial-year ownership.

Why Depreciation Matters for Tax Planning

Depreciation reduces taxable income without requiring a cash expense, making it one of the most powerful tools available to rental owners. It works alongside deductions for taxes, insurance, repairs, management fees and other operating costs to lower overall tax exposure.

For Greater Cincinnati investors, especially those with multiple properties, depreciation can meaningfully reduce taxes even in high cash-flow years.

The Hidden Trade-Off: Depreciation Recapture

Depreciation delivers annual tax savings, but it carries a future consideration known as depreciation recapture. When a rental is sold at a gain, the IRS may tax previously claimed depreciation, generally up to 25%, separately from capital gains.

For instance, $100,000 in claimed depreciation may be subject to recapture at sale, making advance planning essential to preserve overall returns.

Using a 1031 Exchange to Defer Recapture

Many experienced Cincinnati investors manage depreciation recapture through a 1031 exchange, named after Section 1031 of the Internal Revenue Code.

A 1031 exchange lets you postpone paying both capital gains tax and depreciation recapture by reinvesting proceeds from the sale to another property classified as “like-kind”. In practical terms, this means rolling equity forward instead of cashing out.

To qualify, investors must follow strict rules:

• Identify replacement properties within 45 days
• Close on the replacement property within 180 days
• Reinvest proceeds into qualifying real estate used for income

As long as these requirements are met, taxes are deferred, not eliminated, until a future sale without an exchange.

Special Considerations That Affect Depreciation

Depreciation must be calculated accurately and claimed consistently to remain compliant. Key factors include properly separating land and building values, tracking capital improvements and coordinating depreciation across multiple properties.

In Greater Cincinnati, where historic and newer properties coexist, correct allocation is especially important, making real estate–focused tax guidance a smart investment.

Who Can Claim Rental Property Depreciation?

To be eligible for depreciation, several criteria must be met:

• You must own the property, even if it is financed.
• The property must be used to produce income, such as rental use.
• The property must have a determinable useful life.
• The property must be expected to last longer than one year.

If a property is used part-time as a personal residence, special rules apply and depreciation may be limited.

Depreciation and Long-Term Investment Strategy

Depreciation should never be viewed in isolation. It works best as part of a coordinated strategy that includes cash flow management, refinancing decisions, reinvestment planning and exit timing.

Final Perspective for Cincinnati Property Owners

Depreciation is one of the most powerful and misunderstood tools available to rental property owners. It can significantly reduce annual tax liability, improve cash flow and support portfolio growth when used thoughtfully.

However, it also carries long-term implications that must be planned for. The most successful investors treat depreciation not as a shortcut, but as a strategic component of disciplined ownership.

Partner with a management team that gets the full picture.

Tax strategy, asset performance and day-to-day operations are deeply connected. Our Greater Cincinnati property management team works with landlords to ensure properties are not only well-managed, but positioned for long-term financial efficiency.

From operational oversight to performance tracking, we help owners align property management with broader investment goals.