Investing in US real estate: depreciation and 1031s
How a US rental is taxed: property tax by county, depreciation as a deduction with no cash leaving, and the exchange that defers tax when you reinvest.
Updated on 9 August 2026.
What does a US rental purchase cost above the price?
Closing costs run 2% to 5% of the price, which is low by international standards. There is no national transfer tax in the United States. The largest closing item is usually the loan origination fee, and that scales with what you borrow rather than with what you pay. On a $312,000 duplex the closing costs land near $6,300.
Property tax by county: there is no national rate
Property tax in the United States is a local levy on assessed value, charged by the county, the city and the school district together. No federal rate exists. The spread between states is wide, and within a state it varies again by county.
| Extreme | Effective rate | What it means |
|---|---|---|
| New Jersey, highest state | 2.38% of home value | On $312,000 that is about $7,400 a year |
| Hawaii, lowest state | 0.28% of home value | On the same property, under $900 a year |
Source: Tax Foundation, "Property Taxes by State and County, 2026", property tax paid as a share of owner-occupied housing value. Consulted 3 August 2026.
Always pull last year's actual bill for the parcel. A state average tells you almost nothing about the property you are looking at, and in some jurisdictions the assessment resets on sale.
Depreciation: a deduction with no cash leaving the account
Depreciation is an annual write-down of the building, never the land. Residential rental property is depreciated straight line over 27.5 years, with a mid-month convention in the first year (IRS Publication 527, 2025 edition). Commercial property runs over 39 years.
Depreciation = 80% building share × $312,000 / 27.5 = $9,076 a year
Nothing leaves your bank account for that $9,076. It still reduces your taxable rental income every year. A property with positive cash flow can therefore report a tax loss, which is the mechanism most US rental models are built around.
Split the price between land and building using the county assessment ratio, not a rule of thumb. The land share cannot be depreciated, so a generous building share is the first thing an auditor checks.
Passive activity losses: when you cannot use that paper loss
Rental losses in the United States are passive by default, and passive losses offset passive income first. You cannot simply net them against salary. A special allowance lets you deduct up to $25,000 against other income. That allowance phases out above $100,000 of modified adjusted gross income (IRS Publication 925, 2025 edition).
Unused losses are not lost. They carry forward and release when you sell the property. Real estate professionals who meet the IRS hours tests sit outside these limits, which is why that status is worth so much to full-time investors.
This is the opposite of the Australian treatment, where a rental loss offsets other income without a cap.
Closing costs: which items scale with the loan
US closing costs are not the same set of items as European purchase costs, and they do not all hang off the same base. That matters when you change your loan-to-value: some lines move and others do not.
| Item | Base | What it means |
|---|---|---|
| Owner's title insurance | Price | Protects your title against defects; European systems have no equivalent |
| Lender's title and escrow | Fixed amount | Charged by the settlement agent |
| Appraisal | Fixed amount | Ordered by the lender, not by you |
| Recording fee | Fixed amount | Filing with the county recorder |
| Loan origination fee | Loan amount | Rises when you borrow more, not when the property costs more |
| Transfer tax | Price | Set by state and county; sometimes zero |
Above 80% loan-to-value, add private mortgage insurance as an annual cost. You can request cancellation once the balance reaches 80% of the original value, and it must stop automatically at 78% (Homeowners Protection Act 1998).
The 1031 exchange: 45 days to name, 180 days to close
A 1031 exchange defers tax on your gain if you reinvest the proceeds in other US real estate. The deadlines are hard. You identify replacement properties in writing within 45 days of closing, and the purchase must complete within 180 days (IRS, like-kind exchanges, real estate tax tips).
Since the Tax Cuts and Jobs Act the rule covers real property only. US and non-US real estate do not count as like kind, so you cannot roll a US sale into a property abroad. A foreign seller also faces 15% withholding on the gross price under FIRPTA.
Worked example: a $312,000 duplex in Kansas City
Two identical units, bought in 2026. Financing: 75% of the price, amortizing over 30 years at 6.75%. At that loan-to-value there is no mortgage insurance.
| Item | Amount (US$) |
|---|---|
| Purchase price | 312,000 |
| County transfer tax (0.1%) | 312 |
| Owner's title insurance | 1,560 |
| Lender's title and escrow | 1,150 |
| Appraisal | 650 |
| Recording fee | 190 |
| Flood zone and tax service fee | 95 |
| Loan origination fee (1% of 234,000) | 2,340 |
| Total investment | 318,297 |
Rent is $1,450 per unit per month, so $34,800 a year. Operating costs: property tax $4,212 at 1.35%, insurance $2,100, management $2,784, maintenance and vacancy $3,480, water and sewer $1,320. That totals $13,896.
| Measure | Value | What it means |
|---|---|---|
| Closing costs above the price | $6,297 | 2.0% of the price, far below European purchase costs |
| Net operating income | $20,904 | Rent less operating costs, before debt |
| Cap rate on total investment | 6.6% | Normal for the Midwest, not for the coasts |
| Cash flow after debt service | $2,692 | Annual payment of $18,212 on a 30-year loan |
| Taxable result after depreciation | minus $3,890 | Interest of $15,718 plus $9,076 of write-down |
Read those last two lines together. The property hands you $2,692 in cash and reports a loss of $3,890 on the same year. Whether you can use that loss depends on the passive activity rules above.
Sensitivity: a property tax rate of 2.0% instead of 1.35% costs $2,028 more a year. Cash flow drops to $664 and the cap rate falls to 5.9%.
Run your own numbers
Enter the price, your local transfer rate, the closing costs and your loan-to-value in BRIX Calc. It charges the origination fee against the loan and adds mortgage insurance above 80%. Depreciation and your federal return sit outside the tool. Check the net operating income and cash-on-cash return it produces, then compare the United States with six other markets in international property investment.
Frequently asked questions
How much depreciation can I claim on a rental property?
You write down the building over 27.5 years for residential rental property, using the straight line method and a mid-month convention in the first year (IRS Publication 527, 2025 edition). Land is never depreciated. On a $312,000 duplex with an 80% building share that is $9,076 in a full year.
Can I use a rental loss against my salary?
Only within limits. Rental losses are passive, and a special allowance of up to $25,000 applies against other income. It phases out above $100,000 of modified adjusted gross income (IRS Publication 925, 2025 edition). Anything you cannot use carries forward and releases when you sell the property.
Do I pay transfer tax when I buy in the United States?
That depends entirely on the state and county. Some charge a percentage of the price, some charge a flat recording fee, and some charge nothing at all. There is no federal rate, which is why BRIX Calc defaults the US transfer rate to 0% and asks you to enter the local figure.
What happens to depreciation when I sell?
The IRS claws it back through depreciation recapture, taxed on the amount you wrote down. A 1031 exchange defers that along with the gain, provided you meet the 45-day and 180-day deadlines. If you are a foreign seller, the buyer also withholds 15% of the price under FIRPTA.