Key Insights into Depreciation from Beginning to Middle to End

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 Starts

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.

Here are some examples:

  1. You place a rental house in service when that rental is ready and available to rent. Note that you didn’t have to rent it for depreciation to start.
  2. 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.
  3. 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.

Takeaways

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:

  • 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.

Depreciation might seem like a tricky concept, but it’s crucial for anyone dealing with assets in business or rentals. Remember, it’s not about when you start using that fancy new machine or the rental property – it’s when they’re ready and available for their designated purpose. The IRS has spoken!

But hey, if all of this about depreciation still has you scratching your head or you want to make sure you’re maximizing those tax deductions, don’t sweat it! You don’t have to go at it alone. Reach out to the experts at Morris + D’Angelo.

Don’t let complex tax laws hold you back – contact us at Morris + D’Angelo to learn how we can support your financial success! This is our Expertise!


Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo


Daniel Morris
Daniel frequently provides Media Content via Workshops, Podcasts, and Printed Articles on topics like Bitcoin and Cryptocurrency, Wealth Preservation and Planning, Global Banking, and many other high-level financial topics that serve and demonstrate the Value of our Global Network that should be of interest to those who need Private High-Wealth Services.

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