When should a taxpayer start and stop claiming depreciation deduction on a rental property?
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A taxpayer should begin and end claiming depreciation on a rental property according to the following rules, which are consistent across the Internal Revenue Code, Treasury Regulations, and IRS guidance:
1. When to Start Depreciation:
- Depreciation begins when the property is "placed in service" for the production of income, that is, when it is ready and available for rent, not necessarily when it is actually rented. The property is considered placed in service when it is ready and available for a specific use in a rental activity, even if it is not yet actually rented to a tenant. For example, if you complete repairs and list the property for rent, it is considered placed in service at that point, even if a tenant does not move in until later.
- If you convert a property from personal use to rental use, depreciation begins on the date of conversion, i.e., when the property is ready and available for rent as a rental property.
- If the property is temporarily idle (not in use), such as during a vacancy between tenants or while repairs are being made, you continue to claim depreciation as long as the property is held for rental purposes and is available for rent.
2. When to Stop Depreciation:
- Depreciation ends when you have fully recovered your cost or other basis in the property, or when you retire the property from service, whichever occurs first.
- Retirement from service occurs when you permanently withdraw the property from use in a trade or business or from use in the production of income. This can happen if you:
- Sell or exchange the property,
- Convert the property to personal use,
- Abandon the property, or
- The property is destroyed.
- If you stop using the property for rental purposes (e.g., move back in, or use it for personal purposes), depreciation ends as of the date of the change in use.
3. Key Points and Examples:
- If you purchase a rental property, make repairs, and list it for rent on July 1, but do not rent it until September, you begin depreciation on July 1, when it is ready and available for rent.
- If your rental property is vacant between tenants, but you are actively seeking tenants and the property is available for rent, you continue to depreciate the property during the vacancy.
- If you sell the property, depreciation ends on the date of sale.
- If you convert the property to personal use, depreciation ends on the date of conversion.
- Subsection 168(d): The applicable convention (mid-month for residential rental property) determines the portion of the year for which depreciation is allowable in the year the property is placed in service or disposed of.
- Subsection 168(g): For property required to use the Alternative Depreciation System (ADS), the same rules for beginning and ending depreciation apply, but with different recovery periods.
4. Summary Table:
5. Conclusion:
A taxpayer should start claiming depreciation on a rental property when it is placed in service (ready and available for rent), and stop claiming depreciation when the property is retired from service (sold, converted to personal use, destroyed, or fully depreciated).
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