Depreciation is a cost recovery system, not a value measurement. IRC section 167 allows a deduction for the exhaustion of property used to produce income, and the amount you recover is your basis, which section 1012 defines as cost. You are deducting dollars you actually spent. Appraised value reflects dollars you have not spent and gains you have not been taxed on, so the Code gives no deduction for it.
The logic
If depreciation ran on appraised value, owners would deduct unrealized appreciation every year while deferring tax on the gain itself until sale, a double benefit the system is built to prevent. Instead the ledger stays symmetric: you recover what you invested through depreciation, your basis drops as you do under section 1016, and the difference between sale price and that adjusted basis is taxed when you sell, including recapture of prior depreciation under sections 1245 and 1250.
A worked example
You bought a rental in 2016 for $500,000, allocating $100,000 to land. Depreciable basis: $400,000, producing $14,545 per year over 27.5 years per IRS Pub 946. In 2026 the property appraises at $1,100,000. Your deduction is still $14,545. The $600,000 of appreciation shows up exactly once, as gain when you sell. A cost segregation study does not change this rule: it rearranges your existing $400,000 of basis into faster buckets, and on a long-held property a Form 3115 with a section 481(a) catch-up can pull the missed acceleration into the current year, but it never adds a dollar of basis you did not pay.
Where appraisals and assessments actually matter
- Land versus building split. Your purchase price must be allocated between non-depreciable land and depreciable improvements, and the county assessor's land-to-improvement ratio or an independent appraisal is standard support for that split.
- Converting your home to a rental. Depreciable basis is the lesser of your adjusted basis or fair market value on the conversion date, per Pub 946. For a home that lost value, the appraisal controls.
- Inherited property. Basis steps up to fair market value at the decedent's death under IRC section 1014, so heirs depreciate from the appraised value, and a fresh cost segregation study on that stepped-up basis can be unusually powerful.
What does change basis
Capital improvements add to basis dollar for dollar; a $60,000 renovation becomes $60,000 of new depreciable, often bonus-eligible, assets under IRC section 168(k). Refinancing does not; loan proceeds are not cost. And the assessed value on your property tax bill never sets federal depreciable basis, it only helps split the price you actually paid between land and building.