Buy & hold rental bookkeeping
My Rental Never Shows Depreciation — Is That a Problem?
Why This List Exists
A buy & hold rental is the mirror image of a flip: instead of everything staying on the balance sheet until a quick sale, this property is meant to be used for years, and the accounting has to reflect that — a land/building split at acquisition, a recurring depreciation entry, a mortgage payment that's actually three different things, and a sale, whenever it comes, that has to account for every dollar of depreciation taken along the way. Skip any one of those and the property looks fine on paper right up until it doesn't.
The Six Mistakes
01
No Land/Building Split at Acquisition
The full purchase price gets booked to one "property" asset account, with no allocation between land and building — it's one closing statement, so it feels like one number. Land never depreciates; only the building does. Without the split, either nothing depreciates or the depreciation calculation is wrong from day one.
02
The Full Mortgage Payment Coded to Interest Expense
Every mortgage payment gets booked in full to interest expense, because that's what a loan payment "feels like" — it's one line on the bank statement. A mortgage payment is actually three things: principal (reduces the loan balance), interest (the real expense), and often escrow (a prepayment for taxes and insurance, not an expense at all). Booking the whole payment to interest overstates expense and hides that real equity is building with every payment.
03
No Depreciation Posted, Ever
The property sits on the books at its original purchase price indefinitely — nobody set up a depreciation schedule at acquisition, so nobody's been posting the entry. Depreciation is a real, recurring, non-cash expense every period the property is in service; skipping it overstates net income and leaves the sale-date accumulated depreciation figure showing zero, which is its own problem at closing.
04
Capital Improvements Expensed as Repairs
A full roof replacement or a new HVAC system gets coded straight to repairs & maintenance — it's paid in one invoice, so it gets treated like one expense. A full system replacement is a capital improvement: it gets its own asset account and its own depreciation schedule, starting on its own placed-in-service date, not folded into repairs or the original building basis.
05
Security Deposits Sitting in Operating Cash
Tenant security deposits land in the same operating account as rent and get spent like any other cash on hand — there's no separate liability account tracking what's actually owed back. A security deposit isn't the entity's money to spend; it belongs in a liability account until it's returned or applied, and mixing it into operating cash is exactly the kind of thing a departing tenant's attorney looks for.
06
Old Loan Fees Not Written Off at Refinance
A cash-out or rate/term refinance pays off the old mortgage, and the original loan's unamortized fees just stay on the balance sheet instead of being written off — the same gap that shows up on the fix & flip side. Those fees need to be expensed in full the moment the original loan is paid, not carried forward against the new loan.
How This Actually Catches Up With You
A rental file missing these entries doesn't look broken — until the property changes hands.
Path A — the sale forces a reconstruction
The CPA preparing the final return has to rebuild years of depreciation from scratch, the land/building split gets estimated after the fact, and the recapture tax comes as news in the same year the owner is already dealing with a closing.
Path B — the schedule's been running all along
Depreciation posts every period, capital improvements have their own schedules, and the accumulated depreciation balance is always current — so the sale-year tax picture is known well before the closing date, not discovered after it.
The Fix Is Almost Always the Same
1
Split land and building
At acquisition, using the assessor's ratio — land never depreciates.
2
Post depreciation every period
A recurring entry, whether or not the unit was occupied that month.
3
Give improvements their own schedule
A new roof or HVAC starts depreciating on its own placed-in-service date.
4
Split the mortgage payment
Principal, interest, and escrow — never the full payment to one account.
5
Wall off security deposits
A liability account, separate from operating cash, always.
6
Write off old loan fees
In full, the moment a refinance pays off the original loan.
Frequently Asked Questions
Does a rental depreciate even in months it isn't actually rented?
Yes. Depreciation runs on the building's placed-in-service schedule, not on occupancy — a vacancy between tenants, or time spent on a make-ready turnover, doesn't pause it. The property is depreciated for as long as it's held out for rental use.
What is unrecaptured Section 1250 gain?
It's the portion of the gain on sale equal to the depreciation taken over the holding period, taxed at a different federal rate than the remaining capital gain. It only becomes visible at sale, which is why it catches owners who haven't been tracking their accumulated depreciation along the way.
Should a new roof or HVAC system be capitalized or expensed as a repair?
A full replacement — a new roof, a new HVAC system — is a capital improvement, depreciated on its own schedule starting on its own placed-in-service date. A repair that restores the property to its prior condition without extending its life, like patching a section of roof, is expensed as incurred. Borderline cases should follow the client's CPA's capitalization policy.