Does the IRS allow depreciation of commercial real estate by a disregarded entity in the year the property is placed in service, even if rental income starts the following year?
Ask Blue J any tax question, then go deeper. Follow up, add client-specific context, and explore the sources behind every answer with Blue J’s generative AI solution for tax research.
Yes, the IRS allows depreciation of commercial real estate by a disregarded entity (such as a single-member LLC) in the year the property is placed in service, even if rental income does not begin until the following year—provided the property is “ready and available” for its intended use as rental property.
Legal Framework
1. Placed in Service Requirement
- Under the Internal Revenue Code, depreciation begins when property is “placed in service,” which means it is ready and available for its specific use in a trade or business or for the production of income, regardless of whether it is actually being used or generating income at that moment.
- Treasury regulations clarify that property is placed in service when it is in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, for the production of income, in a tax-exempt activity, or in a personal activity.
2. Application to Rental Real Estate
- For rental real estate, the property is considered placed in service when it is ready and available for rent, even if it is not actually rented yet. This is supported by IRS guidance and publications, which state that you begin to depreciate rental property when it is ready and available for rent, not when it is first rented or when rental income is first received.
- For example, if a building is completed, all necessary repairs and improvements are made, and it is advertised for rent, it is considered placed in service at that point—even if the first tenant does not move in until the following year.
3. Disregarded Entities
- A disregarded entity, such as a single-member LLC, is treated as a sole proprietorship for federal tax purposes. The rules for depreciation apply to the owner in the same manner as if the owner held the property directly.
4. Supporting IRS Guidance
- IRS Publication 527 and Publication 946 both state that depreciation begins when the property is ready and available for its intended use, not when it is actually rented or when income is received.
- The IRS has also ruled that property held for rental purposes is depreciable even if it is temporarily vacant, as long as it is available for rent.
5. Examples
- If a commercial building is completed and all necessary permits are obtained in December 2025, and the building is advertised for lease but the first tenant does not sign a lease until February 2026, the building is considered placed in service in December 2025. Depreciation begins in 2025.
- If the property is not yet ready for its intended use (e.g., construction is not complete, or it is not available for rent), it is not considered placed in service, and depreciation cannot begin.
Conclusion
Depreciation of commercial real estate by a disregarded entity begins in the year the property is placed in service—that is, when it is ready and available for its intended use as rental property—even if rental income does not begin until the following year. The key factor is the property’s readiness and availability for its intended use, not the receipt of rental income.
Was this answer helpful?
What Blue J customers are saying
“We are excited to use Blue J to elevate the initial work product our team is able to produce."
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We had used Checkpoint for a long time but found it wasn’t particularly well-used in our practice."
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"We find this tool to be a game-changer for us and our clients.”
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“Blue J is an exciting technology because it enables the practitioner to remain in the driver’s seat of the analysis."
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"We wanted to have a tool that people were using at all staff levels."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
