How to Calculate Schedule E Depreciation for Partially Rented Property?

For a partially rented residential property, here's how you'd handle the depreciation on Schedule E: First, you need to determine the basis for depreciation. Take the lower of your cost basis (purchase price plus improvements) or fair market value when you converted it to rental use. Then multiply that by the percentage used for rental (35% in your case). For residential rental property, you'll use the General Depreciation System (GDS) with a 27.5-year recovery period. You don't actually need to worry about Section 179 for this - that's for business equipment and doesn't apply to residential rental real estate. You'll use Form 4562 to report the depreciation if this is your first year claiming it. In subsequent years, you may not need to file Form 4562 unless you're putting new property into service. To calculate the annual depreciation amount: (Property Basis × Rental Percentage) ÷ 27.5. For example, if your basis is $300,000, the rental portion is $105,000, and your annual depreciation would be about $3,818.

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Don't forget to separate the land value when calculating depreciation! This is a common mistake. Land isn't depreciable, so you need to determine what portion of your property value is for the building only. Your county property tax assessment often breaks this down, or you can use a reasonable method to determine the split (like 80% building/20% land in many residential areas). Also, remember that anything with a useful life of less than 27.5 years (appliances, carpeting, etc.) can be depreciated on a faster schedule than the building itself. This is called component depreciation and can give you bigger deductions sooner.

I find that TurboTax actually does a decent job with rental property depreciation. It asks you questions about when you placed the property in service, the value, percentage used for rental, etc., and then automatically calculates everything, including filling out Form 4562 when needed. If you do use tax software, just make sure you have all your info ready: purchase price of the property, fair market value when converted to rental, percentage used for rental, and an estimate of land value (which isn't depreciable).