An investment property produces rental income while its building component is also written off each year for tax purposes. That annual deduction is depreciation. Tax rules allow owners to recover the cost of the building over a set recovery period.

Residential rental property is typically depreciated over 27.5 years; commercial over 39 years. Land itself is not depreciable. Depreciation lowers taxable income without requiring an actual cash outlay, improving after-tax cash flow. When the property is sold, prior depreciation is recaptured and taxed.

Cost segregation studies can accelerate depreciation by identifying shorter-lived components. Passive activity rules and other limitations may restrict how much depreciation an owner can use in a given year. Accountants track the numbers; owners benefit from the shelter.

Depreciation is one of the few ways a property can lose value on paper while gaining value in the market.