MACRS

MACRS, the Modified Accelerated Cost Recovery System, is the US method for depreciating business property for tax purposes. Residential rental buildings are depreciated straight-line over 27.5 years. The deduction lowers taxable income without touching the pre-tax cash flow behind cash on cash return.

If $400,000 of the default property's price is the building, MACRS allows about $14,545 a year. Land is not depreciable, so the land and building split, often taken from the county assessment or an appraisal, directly sets the deduction.

Components in shorter MACRS classes, such as appliances or carpet, can be depreciated faster, which is the idea behind a cost segregation study. All of these deductions change tax, not cash flow. Cash on cash compares properties on the same pre-tax basis, and MACRS enters after that.

Further reading: MACRS on Wikipedia.