Straight-Line Depreciation in Commercial Real Estate, Explained

There are multiple methods of depreciation in commercial real estate, but straight-line depreciation is the foundational approach. It applies to the building structure itself and to certain improvements that don't qualify for faster write-offs.

So, if you were to buy commercial property with a depreciable value of $1 million, straight-line depreciation lets you deduct roughly $25,641 per year over 39 years. That deduction reduces your taxable income every single year, even if the property is appreciating in market value.

If you are not claiming depreciation correctly, you are overpaying taxes on every return you file.

How Do You Calculate Straight-Line Depreciation?

Find your depreciable basis, then divide that by the asset's recovery period.

Depreciable basis is the starting point of every straight-line depreciation calculation. It includes not only the purchase price of your property, but also closing costs and capital improvements made after acquisition. Notably, it does not include land value, because land doesn't depreciate.

How to calculate depreciable basis

An incorrect depreciable basis at acquisition affects every deduction you will ever take on that property. There is no easy fix once the number is set.

Once you have your depreciable basis, the formula is:

For commercial real estate, the IRS assigns a fixed recovery period to each asset class under the Modified Accelerated Cost Recovery System (MACRS). You may also see recovery period referred to as useful life in general accounting contexts, but under MACRS the period is fixed by the tax code, not by how long the asset actually lasts.

Here is how that looks with a real number. Say you buy an office with a total acquisition cost of $2 million. A professional appraisal determines land value at $400,000, leaving a depreciable basis of $1.6 million. Divide that by 39 years and you get an annual straight-line depreciation deduction of $41,026.

Review current listings in your market to help pressure-test calculations against real asking prices and property values.

The formula applies differently depending on what you are depreciating.

Not every component of a commercial property depreciates over 39 years. Individual components within a building may qualify for shorter recovery periods, and each one gets its own straight-line calculation using its assigned useful life.

A $150,000 parking lot resurface, for example, depreciates over 15 years as a land improvement under MACRS. That gives you a straight-line deduction of $10,000 per year on that improvement alone, separate from the building's 39-year schedule.

Careful CapEx planning before and after acquisition helps you track these components individually rather than folding them into the building basis. When you track components separately, each one generates its own depreciation schedule, and the cumulative effect on your annual deduction can be significant.

Tenant improvement allowances work similarly. When you fund a buildout for a tenant, those costs are capitalized and depreciated. Tenant improvements are generally depreciated over the shorter of their recovery period or the remaining lease term, though qualified improvement property may qualify for a 15-year recovery period under MACRS.

What Are the Advantages and Limitations of Straight-Line Depreciation?

Straight-line depreciation is the simplest and most predictable depreciation method available to CRE investors.

Once you calculate your annual deduction at acquisition, you apply that number every year for the full recovery period.

That consistency makes financial modeling straightforward, reduces the chance of calculation errors over a long hold, and decreases the risk of large swings in your reported income from year to year. For investors who have spent years managing unpredictable income streams, straight-line depreciation offers something rare: a number you can count on.

For investors with higher taxable income, however, the even spread of straight-line can be a trade-off. Accelerated methods front-load deductions into years when your tax bracket is higher, which is where they deliver the most value.

Straight-line depreciation does not reflect how commercial buildings actually age.

Commercial properties do not deteriorate evenly. A building typically requires more maintenance, more capital expenditure, and more frequent system replacements as it ages. Straight-line depreciation assumes a constant rate of value loss, but your actual operating expenses will likely increase over time.

That mismatch means your depreciation deduction stays flat while your real costs of ownership rise. In later years of a long hold, your reported depreciation expense may significantly understate the actual economic wear on the asset. Investors who rely on book value as a proxy for asset condition can be caught off guard by the capital requirements of an aging property.

In year 20 of a 25-year hold, your depreciation deduction is identical to year one. Your maintenance and CapEx bills almost certainly are not.

Straight-line depreciation comes with an opportunity cost.

Consider two investors who each acquire a $2 million commercial property with a $1.6 million depreciable basis. Investor A uses straight-line depreciation and claims $41,026 per year. Investor B uses accelerated methods and claims $200,000 in year one through bonus depreciation on personal property and land improvement components identified through cost segregation.

Assuming a 37% tax bracket, Investor A saves $15,180 in taxes in year one. Investor B saves $74,000. That $58,820 difference in year one alone can be redeployed into the next acquisition, used to pay down debt, or held as reserves. Over a five-year hold, the compounding effect of those early tax savings on Investor B's after-tax cash flow is significant.

In this example, Investor A uses straight-line depreciation, while Investor B uses accelerated depreciation. For an investor planning a shorter hold, the tax savings of accelerated depreciation can be an advantage, while the predictability of straight-line depreciation can work in the favor of an investor planning to hold an asset longer.

The method you choose directly affects the timing of your after-tax cash flows, and timing is what drives internal rate of return (IRR). This is why commercial real estate IRR calculations should always model depreciation method as a variable, not a fixed assumption.

Before you buy a multifamily property or other asset, model your rental property cash on cash return and your commercial real estate IRR under both scenarios before committing. The difference in after-tax returns can be material, and the depreciation method is one of the few variables entirely within your control at acquisition.

When Should You Use Straight-Line vs. Accelerated Depreciation?

Straight-line makes more sense for long holds and when reporting to partners.

Both methods let you deduct the full depreciable basis of an asset over its recovery period. If you're planning a long hold, straight-line depreciation often makes more sense. Accelerated methods give you greater deductions in early years, but you may not fully benefit from that if your taxable income fluctuates over a 10 or 20-year hold period.

If you are reporting to equity partners or lenders, straight-line produces consistent, predictable depreciation figures year over year. That makes financial statements easier to read and reduces the questions that come with front-loaded losses.

The right depreciation method depends on your specific situation.

Straight-line for financial reporting and accelerated for taxes is a common strategy.

You do not have to choose one method for everything. Many CRE investors use straight-line depreciation for GAAP financial reporting while using accelerated methods on their tax return. This is legal and widely practiced.

Straight-line depreciation is what makes that dual-track approach work on the reporting side. With it, the financial statements you show to lenders and partners reflect steady, predictable depreciation while your tax return maximizes early deductions. The gap between the two creates a deferred tax liability that your CPA reconciles annually.

Frequently Asked Questions

Should I use straight-line depreciation or consider cost segregation?

You do not have to choose. Cost segregation identifies components that qualify for accelerated depreciation, typically on five, seven, or 15-year schedules, while the building structure continues depreciating on a straight-line 39-year schedule. The two approaches work together. A cost segregation study generally makes financial sense for properties valued at $1 million or more, with study costs typically ranging from $5,000 to $15,000. Properties with significant tenant buildouts or specialized systems tend to produce the strongest results. The best time to conduct a study is immediately after acquisition, though retroactive studies are available.

How does straight-line depreciation affect my property's financial performance metrics?

Straight-line depreciation reduces net income on paper, but it does not reduce your cash flow. Because no cash leaves your account to produce that deduction, your cash-on-cash return will typically look stronger than your accounting metrics suggest. Over time, accumulated depreciation also creates a gap between your property's book value and its market value, a distinction that matters when refinancing or communicating performance to partners.