Depreciation is an important tax consideration when it comes to investing. I think it is worthwhile to take a close look at when you can start depreciating. Basically you start depreciating an asset on the date it is placed in service. Sounds easy enough but it can be confusing at times.
The easiest way to understand this concept is to go through a couple of examples.
EXAMPLE 1:
An investor finds a duplex and prepares a purchase sale agreement on Jan
3. He closes on the property Feb 16. The property was vacant in January and remains vacant in February. After closing on the property the investor immediately starts work on some renovations. Turns out there were a number of hidden problems and the renovations are not completed until June 15. In anticipation of completing the repair work the investor started listing the property for rent on Jun 1st. Unfortunately it took a couple of months to find good tenants and they move in Aug 1st. What date can be used as the In Service date?
EXAMPLE 2:
Same situation as above only the property has existing tenants that decide to stay after the investor closes on the deal. The property needs some repairs though and the investor starts what he can while the tenants are living there. Discovering how extensive the repairs are he finds it necessary to ask the tenants to leave while he completes the work. He manages to complete the work on Jun 15 but the tenants have found other arrangements and the investor starts advertising July 1st. He manages to get tenants in the units on Aug 1st.
A look at each example:
The earliest possible time for a property to be placed in service is on the day you can claim legal title. In both examples that would be the closing date, Feb 16th. In example 1 though the property is vacant and remains so until Aug 1st. To be considered In Service there must be some rental activity. Unfortunately getting a property ready for use doesn’t qualify. Advertising that the property is for rent does qualify though. In Example 1 the investor could start depreciating the property on June 1st.
Example 2 is different.
The units are occupied on Feb 16th. In this situation the property would be considered in service on Feb 16th. Understanding what is meant by In Service allows you as an investor some flexibility in structuring your purchases. You can greatly improve your tax deduction for that first year simply by changing the timing of events. If the investor in example 1 advertised one unit for rent on Feb 16th the In Service date would have been Feb 16th.
Related posts:
About Charles Perkins
Recent Comments