Rental Property Depreciation: Basis, Timing, and Records

Start with depreciable basis rather than the purchase price alone

The purchase price and certain acquisition costs must be allocated between land and depreciable property. Land is excluded because it is not depreciable. Improvements made before a property is ready to rent may also affect basis rather than create an immediate rental expense.

A conversion from personal use to rental use has additional basis rules. Preserve the original purchase documents, improvement history, and information supporting value at conversion instead of recreating the file years later.

Placed in service means ready and available for its intended use

Depreciation generally starts when the property is ready and available for rent. A closing date, renovation payment, listing date, and first tenant date may be different, so keep records that show when the property was actually available for its intended rental use.

Depreciation stops when property is permanently retired from service, sold, converted to personal use, abandoned, or otherwise withdrawn from income-producing use under the applicable rules.

Different assets can follow different recovery periods

A residential rental building and its structural components generally follow the residential-rental recovery period under the general federal system. Appliances, furniture, carpeting, fences, certain land improvements, and other separately identifiable assets may follow different periods and conventions when the classification is supportable.

A cost-segregation study can analyze component classifications, but it is not a guarantee of savings and can affect later depreciation, state returns, accounting-method questions, and gain or recapture on sale.

Track improvements and prior depreciation through the sale

A capital improvement is generally depreciated separately beginning when that improvement is placed in service. Repairs and maintenance require a different analysis. Keep invoices detailed enough to identify the property component, work performed, project timing, and any allocation across separate items.

Depreciation reduces adjusted basis for a later sale, including depreciation that was allowable under the applicable rules even if it was not claimed correctly. A missing or unreliable depreciation schedule should be reviewed before reporting a disposition.

• Closing statements and the land/building allocation support
• Placed-in-service records for the property and later improvements
• Prior federal and state depreciation schedules
• Invoices, contracts, permits, and cost-segregation reports
• Personal-use dates, rental dates, casualty records, and sale documents