The theory behind depreciation is that an asset -- in this case a house -- loses value over time due to wear and tear. To encourage investment, the IRS has set up rules of depreciation allowing a landlord to deduct a portion of his original investment over a 39-year period. There is no magic in this particular number. It's simply an educated guess of the life expectancy of the average rental property.
Real estate is one of the most tax-favored investments going today. Owning a house that you rent out allows you to take advantage of depreciation, a term referring to an asset's diminishing value over time. Though the reality is that real estate usually appreciates in value, the IRS lets you claim a portion of the rental property's purchase price against your tax bill. While there is no law requiring that you take the depreciation, the IRS assumes you will regardless of whether you do.
The primary advantage of depreciation is that it allows you to recover the cost of your initial investment over a period of time. Since depreciation has the effect of reducing your net income from the property, this also increases cash flow by reducing the amount of income tax you must pay each year. A side effect is that it also reduces the basis upon which a capital gain or loss is figured if you decide to sell it, which is the reason some landlords might wish they could simply ignore depreciation.
The problem with choosing not to depreciate your income property, thus reducing the price basis, is that the IRS assumes you have elected to depreciate. For this reason, you might as well bite the bullet and try to implement the most advantageous depreciation strategy available to you. It could be worth the cost to solicit the opinion of a tax professional because there are several different ways to depreciate.
The IRS uses a four-prong test to determine if the rental property in question is a candidate for depreciation. If you plan to claim the deduction you must personally own the property, it must be used in a business income producing activity, the property must have a determinable useful life span, and that useful life span must be longer than one year. The bottom line is that you don't have to take depreciation on a rental house, but there is no reason not to and you likely can come out ahead if you do it right.