Key Insights into Depreciation from Beginning to Middle to EndTax Planning
Depreciation is a pivotal concept for anyone with assets in the business or rental sector.
Yet despite its significance, depreciation can leave many taxpayers puzzled over when it truly begins.
In essence, depreciation commences not when an asset sees actual utilization, but when it is set and ready for its intended use. This subtle distinction, as outlined by the IRS, is crucial for understanding tax deductions and maximizing asset value.
This article delves into the specifics of when depreciation starts and offers guidance on the nuances of this crucial tax concept, using real-world examples to shed light on the IRS’s perspective. Whether you’re a rental property owner, a business owner, or a farmer, understanding the basics of depreciation can add to your bottom line.
When Depreciation Start
On the day the property is ready and available for a specific use, the IRS says that you placed the property in service, and that’s when your depreciation deductions begin.1
Here are some examples:
- You place a rental house in service when that rental is ready and available to rent.2 Note that you didn’t have to rent it for depreciation to start.
- You operate a farm and buy a planter that the dealer delivers to you in December, after planting season. You placed the planter in service in December despite the fact that you will not use the planter in your farming business until May.
- You place your business vehicle in business service when you buy it for your business, not when you start using it in your business.
Key point 1. Although the rules are clear, you protect yourself best when you both buy a vehicle and drive it for business, so there’s no question about use for business. Key point 2. Similarly, when a rental property is ready and available for rent, list it for rent. With all three boxes ticked (ready, available, and listed), there’s zero question that the property has been placed in service.
Vacant, Idle, or Standing By
Don’t stop claiming depreciation when your depreciable property is temporarily idle.
For example, if you stop using a machine because there is temporarily no market for a product made with that machine, continue to deduct depreciation on the machine.
Similarly, during the time your rental property is vacant and you are looking for tenants, continue to depreciate the rental.
You depreciate property that is used in the trade or business or is held for the production of income. The IRS and the courts have generally construed the phrase “used in the trade or business” to mean “devoted to the trade or business.”
When Depreciation Stops
For the most part, your business and rental properties remain business and rental properties until you remove them from business or rental use.
Generally, this happens when you sell or otherwise dispose of them.
Depreciation starts when the property is placed “in service,” which means it’s ready and available for its designated use, as per the IRS. For example:
- A rental house is considered in service when available for rent, irrespective of whether it’s rented or not.
- Assets such as farming equipment are placed in service when received, even if they aren’t used immediately.
- Business vehicles are in service when bought for business purposes, regardless of when they are driven.
Best practices. For clarity and to avoid potential disputes, it’s beneficial to list rental properties for rent when they are ready and to use a business vehicle soon after purchase.
Continuous depreciation. An asset’s idle or standby status doesn’t halt its depreciation. As long as the asset remains committed to its trade or business purpose, continue to depreciate it.