How to Calculate Depreciation on Rental Property

CFA FRM Real Estate

If you own rental property, depreciation is one of the biggest tax deductions available to you — and the IRS requires you to calculate it correctly. This guide walks you through calculating depreciation on rental property step by step, using the BA II Plus calculator’s built-in Depreciation worksheet.

What Is Rental Property Depreciation?

Depreciation lets you deduct the cost of a residential rental property over its useful life. Instead of expensing the entire purchase price in one year, you spread the deduction across multiple years — reducing your taxable rental income each year.

For residential rental property in the US, the IRS mandates:

Rule	Requirement
Recovery period	27.5 years (straight-line only)
Method	Straight-line depreciation
Convention	Mid-month (property placed in service mid-month)
Land value	Not depreciable — must be separated from building cost

::callout{type=“info”} Key point: You can only depreciate the building, not the land. If you paid $350,000 for a property and the land is appraised at $100,000, your depreciable basis is $250,000. ::

Step-by-Step: Calculate Rental Property Depreciation on the BA II Plus

Step 1: Determine Your Depreciable Basis

Your depreciable basis is:

Purchase price + closing costs − land value = Depreciable basis

Example: You buy a rental property for $350,000. The land is appraised at $100,000.

Depreciable basis = $350,000 − $100,000 = $250,000

Step 2: Open the Depreciation Worksheet

On your BA II Plus:

Key	Action
[2nd] [4]	Open Depreciation worksheet
[2nd] [CLR WORK]	Clear previous values

The display shows SL (Straight-Line) — which is exactly what we need for rental property.

Step 3: Enter the Depreciation Parameters

Press [↓] to move through each field and enter:

Field	Value	Key Sequence
LIF (life)	27.5	27.5 [ENTER]
CST (cost / basis)	250000	250000 [ENTER]
SAL (salvage)	0	0 [ENTER]
YR (year to compute)	1	1 [ENTER]

::callout{type=“warning”} Salvage value for rental property is $0. The IRS assumes the building fully depreciates over 27.5 years — there is no residual value for depreciation purposes. ::

Step 4: Compute the Annual Depreciation

Press [↓] past YR — the calculator computes:

Output	Meaning	Value
DEP	Depreciation for year 1	$9,090.91
RBV	Remaining book value	$240,909.09
RDV	Remaining depreciable value	$240,909.09

Annual depreciation = $250,000 ÷ 27.5 = $9,090.91 per year

This is the same for every full year (years 2 through 27).

Step 5: Check the Final Year

Set YR = 28 (the last year, since year 1 is partial — see below):

28 [ENTER] [↓]

The calculator shows the final partial-year depreciation to zero out the remaining book value.

The Mid-Month Convention: First-Year Adjustments

The IRS requires the mid-month convention for residential rental property. This means:

• Property placed in service in any month is treated as placed in service midway through that month
• You get half a month’s depreciation for the month you place it in service
• You also get half a month in the month you dispose of it

Using M01 on the BA II Plus

After entering LIF, CST, SAL, and YR, press [↓] to reach M01 (the month the property was placed in service):

Field	Value	Key Sequence
M01	Month placed in service (1–12)	e.g., 7 [ENTER] for July

The calculator automatically adjusts the first-year depreciation for the mid-month convention.

Example: Property placed in service in July (month 7):

• Full-year depreciation: $9,090.91
• Months in service year 1: 5.5 (mid-July through December)
• First-year depreciation: $9,090.91 × (5.5 / 12) = $4,166.67

Set YR = 1, M01 = 7, then press [↓]:

Output	Value
DEP	$4,166.67
RBV	$245,833.33

Full Depreciation Schedule (Placed in Service July)

Year	DEP	RBV
1 (partial)	$4,166.67	$245,833.33
2–27	$9,090.91	declining
28 (partial)	$4,166.67	$0.00
Total	$250,000.00

::callout{type=“info”} Notice the schedule spans 28 calendar years even though the recovery period is 27.5 years — because the first and last years are partial. ::

What About Non-Residential Property?

If you’re depreciating commercial property instead of residential rental:

Property Type	Recovery Period	Method
Residential rental	27.5 years	Straight-line
Non-residential (commercial)	39 years	Straight-line
Land improvements	15 years	150% DB or SL
Appliances / furniture	5 years	200% DB or SL

For commercial property, just change LIF = 39 in the BA II Plus — everything else works the same way.

Other Depreciation Methods on the BA II Plus

While rental property must use straight-line, the BA II Plus supports other methods you may need for different assets:

Declining Balance (DB)

Used for 5-year and 7-year property (appliances, furniture in a rental). Press [2nd] [4], then cycle the method with [2nd] [SET] until you see DB.

Field	Description
LIF	Asset life in years
CST	Cost basis
SAL	Salvage value
FAC	Declining balance factor (e.g., 200 for double-declining)

Sum-of-the-Years’-Digits (SYD)

An accelerated method. Cycle to SYD with [2nd] [SET].

Declining Balance with Crossover (DBX)

Switches from declining balance to straight-line when SL produces a larger deduction. Cycle to DBX.

Common Mistakes to Avoid

1. Including land value in your basis — Land never depreciates. Always subtract it.
2. Using the wrong recovery period — 27.5 years for residential rental, NOT 39 years.
3. Forgetting the mid-month convention — Your first-year deduction is always partial.
4. Using an accelerated method for residential rental — The IRS requires straight-line. DB and SYD are for personal property, not the building itself.
5. Not depreciating at all — The IRS considers depreciation “allowed or allowable” — even if you don’t claim it, you still have to reduce your basis by the amount you could have deducted when you sell.

Quick Reference: BA II Plus Depreciation Keys

Key	Function
[2nd] [4]	Open Depreciation worksheet
[2nd] [CLR WORK]	Clear worksheet
[2nd] [SET]	Cycle through SL → SYD → DB → DBX
[↓] / [↑]	Navigate between fields
[ENTER]	Store entered value

Bottom Line

Calculating depreciation on rental property doesn’t have to be complicated. With your BA II Plus:

1. Set method to SL
2. Enter LIF = 27.5, CST = building cost, SAL = 0
3. Set M01 to the month placed in service
4. Scroll to compute each year’s depreciation

The calculator handles the mid-month convention automatically — no manual proration needed. Just enter the right inputs and let the BA II Plus do the math.