Property people talk about tax the way sailors talk about weather: constantly, and mostly in shorthand. Depreciation, 1031, recapture. Behind the jargon sit five fairly ordinary mechanisms in the US federal code, and knowing what each one actually does is worth more than collecting the vocabulary.
In brief
- Residential rental buildings depreciate over 27.5 years; land never does.
- Depreciation is recaptured on sale, at up to 25 %.
- A 1031 exchange has a hard 45-day and 180-day clock.
- These are US federal rules and do not apply to French property.
- 1 1. Depreciate the building, and know what you are borrowing
- 2 2. Deduct what the property actually costs you to run
- 3 3. Holding property inside a retirement account, with the strings attached
- 4 4. Section 1031, and the calendar that runs it
- 5 5. Hold for more than a year, and watch the 3.8 % on top
- 6 Why none of this travels to a French property
1. Depreciate the building, and know what you are borrowing
Depreciation lets you deduct part of the cost of a rental building every year, even in a year when the property gained value. Under the general depreciation system set out in IRS Publication 527, residential rental property is recovered over 27.5 years and non-residential real property over 39 years. Land is excluded outright, because it “generally doesn’t wear out, become obsolete, or get used up”.
What surprises new landlords is that the building is not one single item. Different components sit in different classes.
| Item | Recovery period (GDS) |
|---|---|
| Residential rental building | 27.5 years |
| Non-residential real property | 39 years |
| Land improvements (fences, paving, shrubbery) | 15 years |
| Appliances and carpets | 5 years |
| Land | Not depreciable |
That table is also why cost segregation studies exist: splitting shorter-lived components out of the building pulls deductions forward. The One Big Beautiful Bill Act (P.L. 119-21) restored 100 % bonus depreciation for qualifying property placed in service after 19 January 2025, which made those shorter-lived components considerably more attractive to separate out.
The honest caveat comes at the exit. Depreciation you claimed is not forgiven when you sell: the unrecaptured section 1250 gain is taxed at a maximum rate of 25 %, above the usual long-term rate. Depreciation is a loan from your future self, not a gift.
2. Deduct what the property actually costs you to run
Operating a rental is treated much like operating a business, and ordinary running costs are deductible in the year you incur them. Mortgage interest, property taxes, insurance, repairs, utilities you pay, letting and management fees, advertising, and professional fees all belong in that column.
The line that trips people is the one between a repair and an improvement. Patching a roof is a repair and comes off this year’s income. Replacing the roof is an improvement, and it joins the depreciation schedule instead. Getting that boundary wrong in your favour is one of the easier ways to attract a question you would rather not answer, so keep invoices that describe the work, not just the amount.
3. Holding property inside a retirement account, with the strings attached
A self-directed IRA can hold real estate, and income and gains inside it grow tax-deferred, or tax-free in a Roth. That much is real. The conditions around it are stricter than most summaries admit.
The property has to be a genuine investment held at arm’s length. You cannot live in it, use it yourself, or let a disqualified person use it, and the prohibited transaction rules under section 4975 are unforgiving about that. There is a second trap that rarely gets mentioned: if the IRA buys with a mortgage, the debt-financed share of the income becomes unrelated business taxable income, and the IRA itself has to file a Form 990-T and pay tax. Leverage, the thing that makes property investing work, is exactly what erodes the shelter here.
4. Section 1031, and the calendar that runs it
A 1031 exchange lets you roll the gain from one investment property into another instead of paying tax on it now. Since 2018 it applies to real property only: personal and intangible property were removed, and real property held primarily for sale does not qualify either.
The deadlines are the part that decides whether it works. Per the instructions to Form 8824, the replacement property must be designated in writing no later than 45 days after you transfer the property you gave up, and must be received by the earlier of the 180th day after that transfer or the due date of your return for that year, including extensions. That second half of the rule catches people who sell late in the calendar year and assume they have a full 180 days.
An exchange also needs a qualified intermediary in place before the sale closes. Touching the proceeds yourself is enough to end the deferral.
5. Hold for more than a year, and watch the 3.8 % on top
Holding period alone changes the rate. Hold an asset for more than one year before disposing of it and the gain is long-term, taxed at 0 %, 15 % or 20 % depending on your taxable income, with those bands adjusted for inflation each year. Sell inside a year and the profit is short-term, taxed at your ordinary income rate.
Sitting above that is the net investment income tax: 3.8 % on net investment income, which explicitly includes rental income and capital gains, once modified adjusted gross income passes $200,000 for a single filer or $250,000 for a married couple filing jointly. It applies to the gain on a rental sale. It does not apply to gain on a personal residence that is already excluded from tax.
Why none of this travels to a French property
This is worth saying plainly, because I get asked it often here. Every mechanism above is US federal tax law. Buying an apartment in Nice or Antibes puts you under a different system entirely, with its own rules on rental income, wealth tax on property and gains on resale, and there is no French equivalent of a 1031 exchange. If you hold a US passport you may well be filing in both places, which is a conversation for a cross-border adviser rather than a blog. For a sense of how differently the paperwork works on this coast, the process I described for buying and selling property in Monaco is a useful contrast.
This article is general information, not tax advice. Rates, thresholds and eligibility change, and the right answer depends on your own situation: check it with a qualified tax professional before you act.
Thinking about buying with someone else?
How ownership is structured between several people shapes what happens later, on tax and on everything else.
Updated 11 August 2026. Sources consulted: IRS Publication 527 (2025) for recovery periods and non-depreciable land; IRS Topic no. 409 for long-term capital gain rates and the 25 % maximum on unrecaptured section 1250 gain; IRS instructions to Form 8824 for the 45-day and 180-day rules and the real-property limitation from 2018; IRS guidance on the net investment income tax for the 3.8 % rate and thresholds; IRS Publication 598 for unrelated debt-financed income; One Big Beautiful Bill Act (P.L. 119-21) for the restoration of 100 % bonus depreciation.
