Ask ten Vermont landlords to explain depreciation and you will get ten different answers, most of them partly wrong. The depreciation rental property owners take each year is one of the least intuitive parts of owning a rental: it is an expense you deduct without spending any money, it applies to the building but not the land under it, and it quietly follows you all the way to the day you sell. Understanding the concept is genuinely useful. Calculating it is not your job.
Which brings up the disclaimer, and it is not boilerplate — it is the actual point of this post. We are a property management company, not tax advisors. This article deliberately contains no recovery periods, percentages, dollar limits, or tax rates, because those depend on your situation, they change, and getting them wrong is expensive. Everything here is conceptual. Work with a tax professional who handles rental property, ideally starting in your first year of ownership rather than your fifth.
The idea in one paragraph
Tax rules recognize that a building wears out over time. Rather than letting you deduct the full cost of the building in the year you buy it, they let you recover that cost gradually across a period of years. Each year, a portion of the building’s cost is treated as an expense against your rental income. You are not writing a check for it. It is a paper expense — which is exactly why it confuses people the first time they see it on a return.
Land does not depreciate
This is the distinction that trips up nearly everyone. Land is considered not to wear out, so it is not depreciated. Only the building and certain improvements are.
That means the purchase price has to be split between land and structure before anything else can happen. As a purely hypothetical illustration: if a property is purchased and a portion of the price is attributed to the land, only the remaining portion attributable to the building enters the depreciation calculation. How that split is determined — and what evidence supports it — is a technical decision your tax professional makes, often using assessment records, an appraisal, or another defensible method. It is not a number to guess at.
What it does to your taxable income
Because depreciation is treated as an expense, it reduces the taxable income the rental produces. The consequence owners find surprising is that a property can generate positive cash in your bank account while showing a smaller taxable profit, or in some cases a loss, on paper.
Whether and how that paper loss can be used against other income depends on rules that are complicated and highly situation-specific — how involved you are in the property, your overall income picture, and more. This is precisely the area where reading a blog post and acting on it goes wrong. Ask your tax professional what applies to you.
It is also why cash-flow planning and tax planning are separate exercises. What determines whether you can cover a new roof is the money in the account, not the figure at the bottom of a tax form.
Cost basis is the foundation
Depreciation runs off your cost basis in the property — broadly, what you have invested in it for tax purposes. It is established when you acquire the property and it changes over time as certain costs are added.
| Category | Why it matters |
|---|---|
| Purchase price and certain acquisition costs | Establishes the starting point |
| Land vs. building allocation | Only the building portion is depreciated |
| Capital improvements | Generally added to basis and recovered over time |
| Repairs | Generally treated differently from improvements |
| Value when a personal home became a rental | Conversion has its own basis rules |
| Accumulated depreciation taken | Reduces basis as the years go by |
Two rows there deserve emphasis. First, repairs versus improvements — fixing something that broke and upgrading something that worked are treated differently even when the invoice looks nearly identical. Do not sort these yourself. Keep invoices that describe what was actually done rather than showing only a total, and let your accountant classify them. Vague invoices are the enemy; our maintenance and repairs coordination produces itemized documentation for exactly this reason.
Second, converting a home to a rental has its own basis rules that differ from a straight purchase. Owners who moved and rented out the old house should raise this with a tax professional specifically. Becoming an accidental landlord in Vermont covers the other loose ends that conversion creates, including the insurance one addressed in landlord insurance vs homeowners insurance.
Recapture: the part nobody mentions until closing
Here is the piece that catches owners off guard years later. Depreciation is not free money. When you sell, the tax rules generally look back at the depreciation associated with the property and account for it in the calculation of what you owe — a concept commonly called depreciation recapture.
Two practical implications:
Plan for it before you sell, not during. Owners who discover recapture while under contract are having a stressful conversation at the worst possible time. If a sale is on your horizon, raise it with your tax professional well in advance.
Skipping depreciation is generally not a clever workaround. Owners occasionally reason that not claiming it avoids the issue later. The rules are not that forgiving, which is another argument for professional help from year one.
Records are what make any of this work
None of the above functions without documentation, and documentation cannot be reconstructed years later from memory. What matters: closing documents from the purchase, the land and building allocation and how it was determined, itemized invoices for significant work, clean annual income and expense records, and prior returns showing depreciation already taken.
That paper trail is where a property manager genuinely contributes — not to your tax position, but to the record behind it. Rent collection and accounting exists to capture income and expenses as they happen and hand your accountant a year-end statement they can work from. For the categories that sit alongside depreciation, see rental property tax deductions for Vermont owners.
The takeaway
Depreciation is the building being written off over time, the land staying out of it, your basis driving the math, and recapture waiting at the sale. Understand the shape of it, keep records that would survive a stranger reading them, and hand the specifics to a qualified tax professional every single year.
If you want your rental’s records handled properly from the start, get in touch or call (802) 780-0780 for a free rental consultation, and we will show you what our owner reporting actually looks like.