According to IRS Publication 946, you begin depreciating your property when you place it in service for its intended use and use the property for the generation of income.
You stop depreciating the property when you have fully recouped your original cost basis or when you take it out of service, whichever occurs first.
You place property in service when it is ready and available for its specific use. Depreciation must be used whether the asset is in a business activity, an income-producing activity, a tax-free activity, or a personal activity. Even if you are not depleting the property, it is in service when it is ready and available for its specific use.
Let’s look at some IRS examples.
Michael bought a drill press machine for his business. The machine was delivered in December of last year. The device was not installed and operational until January of this year. It is considered placed in service this year.
On May 30th of this year, Karol bought a house to use as a rental property. She made numerous repairs and had it ready for tenants on September 3rd. At that time, she began to advertise on the internet. The rental property is considered placed in service, and depreciation must begin in September when it was ready and available for rent.
Jimmy is a contractor who specializes in commercial buildings. He bought a truck last year that had to be modified. The modification installation was finished, and James took delivery of the newly modified truck on February 11th of this year. The truck was placed in service on February 11th, when it was ready and available to perform its intended function.
What About a Conversion to a Business Use?
If you change depreciable property currently in service to personal activity, you cannot continue to claim depreciation. However, if you change the property’s use from personal to a business income-producing activity, you can begin to depreciate it at the time of the change.
Kevin Jerry is a nationally recognized expert in Tax Method Changes. He specializes in Cost Segregation, Tangible Property Regulations, and revenue recognition changes. Kevin graduated cum laude from the University of Cincinnati with a Master of Science in Real Estate Taxation. Over the last seven years, he has worked with Eric Wallace on the Tangible Property Regulations with some of the largest property owners in the country.