Rental property depreciation and recapture for doctors begins with basis and the date the property is placed in service, not simply the purchase date. The owner separates land from depreciable property, tracks improvements, applies the correct recovery period, and maintains the schedule through a later sale. Cost segregation may change the timing for qualifying components, but it does not remove the need to calculate adjusted basis and sale consequences.

Depreciation from purchase to placed-in-service date

A rental property is generally placed in service when it is ready and available for its intended rental use. The closing date may be earlier or later than the placed-in-service date. Renovation work, permits, advertising, and the first availability to tenants can matter. Retain the lease, listing, inspection, and utility records that support the date.

Property held for personal use before conversion to rental has additional basis and timing considerations. Do not start with a generic annual amount before identifying the conversion facts and applicable limitations.

Establishing basis for a rental property

Begin with the acquisition cost and allocate land, building, and other assets. Add eligible capital improvements and certain acquisition costs as required. Land is not depreciated, while the building and qualifying components may be. A physician should reconcile the basis schedule to the settlement statement, appraisal or allocation support, invoices, and prior returns.

Basis can change through improvements, casualty adjustments, depreciation, and other events. A cost-segregation study may break the depreciable portion into multiple classes, but it should reconcile to total depreciable basis and explain any assumptions.

Recovery periods and the annual depreciation calculation

Residential rental buildings generally use a 27.5-year recovery period under the applicable convention, while nonresidential property generally uses a different period. Personal property and land improvements can have shorter lives when the facts support their classification. The annual calculation depends on the asset class, placed-in-service month, convention, and any applicable first-year rules.

For a simple illustration, assume a residential rental building has $550,000 of depreciable basis after removing land and qualifying non-building items. A straight-line calculation over 27.5 years would start with approximately $20,000 per full year before considering convention, partial years, improvements, or limitations. This is an educational example, not a return calculation.

When cost segregation may change the timing

A cost-segregation study may identify qualifying shorter-lived components and can change when deductions occur. The decision should include study fees, documentation quality, current tax attributes, passive-activity rules, bonus-depreciation rules for the year, and the expected holding period. A larger first-year deduction is not automatically a better lifetime result.

For a physician with substantial W-2 income, the owner should separately analyze passive losses, basis, at-risk limits, participation, and whether deductions are currently usable. The page’s physician focus describes planning questions, not a promise that rental depreciation offsets wages.

What happens to depreciation when the property is sold

Depreciation recapture

Depreciation claimed or allowable reduces adjusted basis. On sale, the prior depreciation can affect the character and amount of gain, including possible unrecaptured Section 1250 gain or other recapture treatment depending on the asset. The calculation requires the asset schedule and sale details.

Capital gain and other sale components

Total gain is not the same as depreciation recapture. Compare amount realized with adjusted basis, then separate the portions that may receive different character or rate treatment. Selling expenses, improvements, suspended losses, debt, and state adjustments can affect the complete result. Coordinate the analysis with any applicable exchange or residence rules rather than treating every sale as one capital-gain number.

Physician-focused worked example

Illustrative facts only: A physician buys a rental for $700,000, allocates $150,000 to land, and has $550,000 of depreciable building basis. The property is placed in service in July, later receives $40,000 of documented improvements, and is sold after several years. The owner would calculate depreciation by asset and year, reduce basis by depreciation claimed or allowable, add the improvements under their proper treatment, and compare adjusted basis with the amount realized.

The example does not state a tax bill or a guaranteed savings amount. A cost-segregation study could create additional asset classes, and passive losses or state adjustments could change the return. The records and the year-specific rules control.

Records to retain

Purchase contract, settlement statement, and land/building allocation.
Placed-in-service evidence and first rental listing or lease.
Invoices and payment records for capital improvements.
Depreciation schedules, prior returns, and any cost-segregation report.
Rental income, expenses, personal-use calendar, and suspended-loss workpapers.
Sale contract, closing statement, selling costs, and basis reconciliation.
Federal-to-California adjustment schedules and source documents.

Frequently asked questions

Is depreciation based on the full purchase price?

No. Land is generally not depreciable, and the purchase price must be allocated among land, building, and other assets under the applicable rules.

Does cost segregation erase recapture?

No. It can change the timing and asset classification of deductions, but prior depreciation can still affect adjusted basis and sale treatment.

Can rental depreciation automatically reduce a doctor’s salary income?

No. Passive-activity, basis, at-risk, participation, and other rules determine whether a loss is currently usable.

Sources and next steps

Tax rules depend on the facts, the year, and the taxpayer’s complete return. Review the primary sources below and discuss the facts with a qualified tax professional before acting.

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Rental Property Depreciation & Recapture for Doctors