Rental Property Depreciation: This Is Where Many Investors Get It Wrong

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Rental Property Depreciation: This Is Where Many Investors Get It Wrong

William ThompsonBusiness Member
Accountant · Williamstown, NJ · Member since 2025 · 341 posts · 182 votes

One thing I see every tax season is investors depreciating their rental property incorrectly — not because they’re careless, but because no one ever explained what actually gets capitalized.

Here’s the simple rule of thumb:

Your starting point should always be your HUD-1 / Closing Disclosure.

Typically capitalized:

  • Purchase price (excluding land)
  • Facilitative acquisition costs tied to the purchase

Typically not capitalized:

  • Loan costs
  • Operating expenses
  • Escrow items (taxes, insurance, prepaid interest)

When everything gets lumped together, depreciation gets distorted — and that can lead to problems later, especially if you refinance, sell, or do cost segregation.

Getting the capitalization right from day one makes everything else cleaner:
depreciation, tax planning, and future exits.

If you want a second set of eyes, DM me “HUD-1” and I’ll help make sure your property is properly capitalized.

Curious — did you ever review how your rental was originally capitalized, or did you assume it was done correctly?

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Sean GrahamBusiness Member
Investor , CPA · Detroit, MI · Member since 2016 · 587 posts · 249 votes
9mo
Quote from @William Thompson:

One thing I see every tax season is investors depreciating their rental property incorrectly — not because they’re careless, but because no one ever explained what actually gets capitalized.

Here’s the simple rule of thumb:

Your starting point should always be your HUD-1 / Closing Disclosure.

Typically capitalized:

  • Purchase price (excluding land)
  • Facilitative acquisition costs tied to the purchase

Typically not capitalized:

  • Loan costs
  • Operating expenses
  • Escrow items (taxes, insurance, prepaid interest)

When everything gets lumped together, depreciation gets distorted — and that can lead to problems later, especially if you refinance, sell, or do cost segregation.

Getting the capitalization right from day one makes everything else cleaner:
depreciation, tax planning, and future exits.

If you want a second set of eyes, DM me “HUD-1” and I’ll help make sure your property is properly capitalized.

Curious — did you ever review how your rental was originally capitalized, or did you assume it was done correctly?


 Super good post, what gets capitalized vs. expensed can be extremely confusing and should be confirmed with your tax CPA, so you get the correct depreciable basis for cost segregation.

Maven Cost Segregation Tax Advisors553 Reviews
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  • Sean GrahamBusiness Member
    Investor , CPA · Detroit, MI · Member since 2016 · 587 posts · 249 votes
    9mo
    Quote from @William Thompson:

    One thing I see every tax season is investors depreciating their rental property incorrectly — not because they’re careless, but because no one ever explained what actually gets capitalized.

    Here’s the simple rule of thumb:

    Your starting point should always be your HUD-1 / Closing Disclosure.

    Typically capitalized:

    • Purchase price (excluding land)
    • Facilitative acquisition costs tied to the purchase

    Typically not capitalized:

    • Loan costs
    • Operating expenses
    • Escrow items (taxes, insurance, prepaid interest)

    When everything gets lumped together, depreciation gets distorted — and that can lead to problems later, especially if you refinance, sell, or do cost segregation.

    Getting the capitalization right from day one makes everything else cleaner:
    depreciation, tax planning, and future exits.

    If you want a second set of eyes, DM me “HUD-1” and I’ll help make sure your property is properly capitalized.

    Curious — did you ever review how your rental was originally capitalized, or did you assume it was done correctly?


     Super good post, what gets capitalized vs. expensed can be extremely confusing and should be confirmed with your tax CPA, so you get the correct depreciable basis for cost segregation.

    Maven Cost Segregation Tax Advisors553 Reviews
    WebsiteView Page
    1Reply
  • James JonesPro Member
    Investor · Collierville, TN 38017 · Member since 2017 · 926 posts · 637 votes
    9mo

    One thing I see every tax season is investors depreciating their rental properties incorrectly. Not because they’re careless, but because no one ever clearly explains what actually gets capitalized.

    Here’s a simple rule of thumb:

    Your starting point should always be your HUD-1 or Closing Disclosure.

    Typically capitalized:

    Purchase price allocated to the building (excluding land)

    Direct acquisition costs tied to the purchase

    Typically not capitalized:

    Loan costs

    Operating expenses

    Escrow items such as taxes, insurance, and prepaid interest

    When everything gets lumped together, depreciation becomes distorted. That can create issues later, especially if you refinance, sell, or pursue cost segregation.

    Getting capitalization right from day one makes everything cleaner: depreciation, tax planning, and future exits.

    If you want a second set of eyes, DM me "HUD-1" and I'm happy to sanity-check how your property was capitalized.

    0Reply
  • Allan C.
    Rental Property Investor · Member since 2018 · 828 posts · 810 votes
    9mo

    I like the intent of your post, but you should go one step further to explain why it matters to capitalize properly. Or better put, how do you maximize expenses and minimize capitalization. 

    as an investor, capitalization sucks. It's foregone cash outlay that doesn't offset income tax burden (it really slowly offsets, which is same as not offsetting when accounting for time value of money).

    Investors should try to expense to the max that tax code allows to shield income (hence the golden pot of accelerated depreciation). 

    if investors incorrectly capitalize something that should be expensed, they essentially lose 1-2x the value of what they incorrectly capitalized. So if they capitalize $5k of pre-paid taxes, they essentially lose $5-10k over a 5-10 yr span. 

    1Reply
  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    9mo

    @William Thompson great post. This is something I intentionally help clients with. So often, when clients come over, I see missed items that could have been included in the basis of the property. Sometimes you don't even see land on the books which is obviously absurd.

    Allen - I think the point of the post was to discuss the closing statement and how that impacts what gets capitalized. Pretty much everything needs to get capitalized except for insurance expense and prepaid interest. 

    Once the property is placed in service, you're absolutely right that you'll want to find ways to increase expenses and decrease the amount you capitalize. De minimis safe harbor is your best friend for trying to expense. 

    [email protected]
    Brick House CPAs53 Reviews
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