When Should a Rental Property Be Placed in Service for Tax Purposes?

Investing in rental property can be a profitable decision if the property owners are mindful of the tax implications of their investments. One crucial concept they need to understand is the IRS's designation of when a rental property is "placed-in-service." The IRS allows depreciation tax deductions for qualified property used in the taxpayer’s business or held to produce income when a property is placed in service. The date a property is placed-in-service can be significant under the current tax rules, allowing 60% bonus depreciation on certain types of property in 2024, but only 40% in 2025, 20% in 2026 and 0% bonus depreciation thereafter. (Note: Cost segregation studies can provide strategies to increase the amounts in certain property classes eligible for bonus depreciation.) 

IRS Criteria for Placed-in-Service Date 

When a rental property undergoes extensive development before it is available for the production of income, the exact date when the property is placed-in-service can be tricky, especially if the project has multiple milestone dates to consider. The IRS considers the property placed-in-service when the following three elements are all provided: 

Readiness 

Determining if the rental property is habitable and legally able to be rented. The property has to be in a condition that is suitable for occupancy. This includes completing any repairs or improvements necessary to make the property habitable. 

Availability 

The property needs to be advertised as ‘available for rent’. This can be done by listing the property on rental websites, placing ads, using word-of-mouth, or hiring a property management company to find tenants. 

Capability to perform its intended function  

This is emphasized by the IRS and has been interpreted differently by the courts and the IRS in the past. Many taxpayers take the position that a rental property is capable of performing its intended function when it is made available to be turned over to a tenant when it is improved in accordance with a specific lease. 

Determining Availability to be Placed in Service 

A property is deemed fit for rental use when it complies with the physical and administrative requirements set under the local housing codes and regulations. This involves getting any permits or inspections mandated by local authorities. A taxpayer can generally claim that a rental property is ready if it receives or is ready to receive a Certificate of Occupancy (CO) from a state or local authority. The rules regarding a CO can vary between different localities; however, if the property is legally allowed to be occupied, it should meet this readiness requirement.  

If a property is available to be rented and there is some attempt to make it known to the market, it does not need to have a signed lease to be considered in service. Documentation of attempts to advertise the property to the marketplace is helpful to demonstrate that the property was available. 

The capability to perform its intended function is emphasized by the IRS and has been interpreted differently by the courts and the IRS in the past. Many taxpayers take the position that rental property improvements are placed in service when it is turned over to a tenant. In the Stine, LLC v. U.S. case, 2015 U.S.T.C. Par. 50172 (W.D. LA. 2015), the IRS argued that a retail store was not placed in service until it was open to the public.   

The courts agreed with the taxpayer. However, after Stine, the IRS stated that it disagreed with the court’s decision and maintained that a retail property is only capable of performing its intended use when the store is open to the public. This position by the IRS should be understood when evaluating the placed-in-service date you should use.  

Implications of Placed in Service Date on Depreciation 

The placed-in-service date determines the amount of depreciation deductions available for the tax year.  If you have bonus depreciation-eligible property, placing the property in service before year-end gives the taxpayer 20% more bonus depreciation than in the subsequent tax year through the end of 2026. This accelerated deduction can provide the taxpayer with significant tax savings in the year placed in service.   

By understanding the nuances of the depreciation timeline, investors and owner-operators can better navigate the tax system and optimize the available benefits. To explore an action plan that suits your requirements, reach out to our trusted tax advisors by filling out the form below.