Depreciation deductions can save real estate investors thousands of dollars each year—but only if you can prove exactly when your property became available for rent. The IRS doesn’t care when you closed on the property or when a tenant finally moved in. They care about the placed-in-service date, and without proper documentation, your deductions are vulnerable.
This guide covers how to determine your placed-in-service date, the bookkeeping entries that protect your depreciation claims, and the documentation you’ll want on hand if the IRS ever asks questions.
What Is a Placed-in-Service Date for Rental Property
A placed-in-service date is the exact day a property becomes ready and available for its intended income-producing function—not the day you bought it or the day a tenant moves in. This date marks when depreciation deductions can legally begin, which is why the IRS pays close attention to how you document it.
Here’s the key distinction: purchasing a property doesn’t automatically start the depreciation clock. A fixer-upper sitting vacant during renovations isn’t producing rental income yet, so the IRS doesn’t consider it “in service.” Only when the property reaches a condition where a reasonable tenant could move in does depreciation become available.
Getting this date right affects every depreciation calculation for the life of your ownership. It also determines whether you qualify for bonus depreciation and how much you can claim in that first year.
How to Determine Your Property’s Placed-in-Service Date
The IRS uses a simple test: property is placed in service when it’s “ready and available” for rental use. Applying this test to real situations, though, takes some understanding of what those words actually mean.
Ready and Available for Rental Use
A property meets the “ready and available” standard when it’s in habitable condition and you’re holding it out for rent. This typically means utilities are connected, major safety issues are resolved, and basic systems like plumbing and heating work properly.
You don’t need a signed lease or a tenant moved in. You just need the property in a condition where someone reasonably could live there.
Vacant Properties Held for Rent
A property can be placed in service while sitting empty. If you’ve finished renovations, listed the property for rent, and are actively marketing it, the placed-in-service date is when it became move-in ready—not when someone finally signs a lease.
Your intent matters here. Documentation of that intent, like rental listings or property manager emails, becomes your proof if the IRS ever asks questions.
Renovation and Repair Periods
Properties undergoing substantial renovation are not considered placed in service until the work wraps up. If you close on a property in December but spend three months gutting and rebuilding it, your placed-in-service date lands in March when renovations finish—not December when you bought it.
Brief repairs that don’t prevent occupancy, on the other hand, don’t delay the date. A fresh coat of paint or a replaced faucet won’t push back when depreciation starts.
Documents That Prove Your Placed-in-Service Date
Documentation is your defense in an audit. The IRS requires you to substantiate the exact date depreciation began, and the burden of proof falls entirely on you.
Closing Statements and Purchase Contracts
- HUD-1 settlement statement or closing disclosure
- Purchase agreement with dates
- Title transfer documents
Property Inspection Photos and Reports
- Timestamped photos showing move-in ready condition
- Professional inspection reports
- Certificate of occupancy when applicable
Rental Listings and Marketing Records
- MLS listings with publication dates
- Zillow, Craigslist, or Facebook Marketplace ads
- Property manager correspondence showing when advertising began
Lease Agreements and Tenant Communication
- First lease signed, even if dated after placed-in-service
- Tenant inquiry emails
- Records of property showings
Bookkeeping Entries When a Property Is Placed in Service
Proper accounting when a property enters service sets the foundation for years of accurate depreciation deductions. Getting this wrong at the start creates compounding problems down the road.
1. Record the Property Acquisition at Cost Basis
Cost basis includes the purchase price plus closing costs, legal fees, title insurance, and other acquisition expenses. Some costs get added to basis and depreciated over time, while others can be expensed immediately in the year you pay them.
2. Allocate Purchase Price Between Land and Building
Land is never depreciable—only the building and improvements qualify. You’ll want to establish a reasonable split, typically using property tax assessments or professional appraisals.
| Component | Typical Allocation Approach |
|---|---|
| Land | Based on tax assessment ratio or appraisal |
| Building | Remaining value after land allocation |
| Total Cost Basis | Purchase price plus acquisition costs |
This allocation directly affects your annual depreciation deduction, so accuracy matters from day one.
3. Set Up the Depreciation Schedule
The IRS requires using MACRS (Modified Accelerated Cost Recovery System) for rental property depreciation. Your placed-in-service date determines the first year’s partial deduction through what’s called the mid-month convention, which we’ll cover shortly.
4. Capitalize Improvements with Separate Placed-in-Service Dates
Each capital improvement—a new roof, HVAC system, or kitchen renovation—has its own placed-in-service date and depreciation schedule. Tracking improvements separately maximizes your deductions and keeps your records audit-ready.
How Placed-in-Service Dates Affect Depreciation Calculations
The placed-in-service date directly determines how much depreciation you can claim each year and over what time period.
MACRS Recovery Periods for Residential and Commercial Real Estate
Recovery period refers to how many years you spread depreciation deductions across. Different property types use different periods:
| Property Type | Recovery Period |
|---|---|
| Residential rental buildings | 27.5 years |
| Commercial buildings | 39 years |
| Land improvements like landscaping and parking | 15 years |
| Personal property like appliances and carpeting | 5-7 years |
Mid-Month Convention Rules
The IRS assumes property is placed in service at the midpoint of the month, regardless of the actual date. A property placed in service on March 1st or March 28th both receive the same first-year depreciation—as if placed in service on March 15th.
This convention simplifies calculations but also means timing your placed-in-service date strategically within a month doesn’t provide any tax advantage.
Straight-Line Depreciation for Real Property
Real estate buildings use straight-line depreciation, meaning equal deductions each year over the recovery period. Unlike vehicles or equipment, you can’t accelerate building depreciation through methods like double-declining balance.
Bonus Depreciation Requirements and Placed-in-Service Timing
Bonus depreciation allows accelerated deductions for qualifying property components in the year they’re placed in service. However, the building structure itself doesn’t qualify—only certain components do.
Property That Qualifies for Bonus Depreciation
Building components identified through cost segregation studies qualify for bonus depreciation: lighting fixtures, flooring, landscaping, parking lots, and certain mechanical systems. The building structure and land do not qualify.
Current Phase-Out Percentages
Bonus depreciation percentages depend on when property was placed in service and are currently being phased out. The percentage you can claim varies by year, so consulting a tax advisor for current rates is essential before making investment decisions based on bonus depreciation assumptions.
Documentation Needed for Bonus Depreciation Claims
- Cost segregation study from a qualified engineer
- Detailed asset listing with individual placed-in-service dates
- Supporting invoices and installation records for each component
Cost Segregation Studies and Placed-in-Service Records
Cost segregation is a tax strategy that breaks down a building into components with shorter depreciation lives. Instead of depreciating your entire building over 27.5 or 39 years, a cost segregation study identifies components that can be depreciated over 5, 7, or 15 years.
This approach significantly increases first-year deductions. However, it also requires meticulous bookkeeping—each identified component needs its own placed-in-service documentation to defend the accelerated deduction if the IRS asks questions.
Special Situations That Change Placed-in-Service Rules
Standard rules don’t always apply cleanly to every situation. Here are some common scenarios where the typical approach changes.
Personal Residence Converted to Rental Property
When you convert your home to a rental, the placed-in-service date is the conversion date—not when you originally bought the house. Your depreciation basis is the lower of fair market value at conversion or your adjusted basis, which often surprises homeowners expecting to depreciate their full purchase price.
Inherited Real Estate
Inherited property receives a stepped-up basis to fair market value at the date of death. The placed-in-service date is when you begin holding the property for rental income after inheriting it.
Mixed-Use Properties
Properties used partially for personal and partially for rental purposes require allocating depreciation only to the rental portion. A duplex where you live in one unit and rent the other, for example, only allows depreciation on the rental unit.
Properties Offline for Major Renovations
If you take a rental property out of service for substantial improvements, it may require a new placed-in-service determination when returned to rental use.
How to Defend Your Depreciation Deductions in an IRS Audit
Proper documentation transforms depreciation from a potential audit liability into a defensible tax position.
What Triggers Depreciation Audits
Several factors attract IRS attention:
- Large depreciation deductions relative to income: Significant deductions on properties with modest rental income raise questions.
- Cost segregation studies: Accelerated depreciation through cost segregation often prompts closer review.
- Inconsistencies between tax years: Changing methods or calculations year-to-year creates red flags.
- Rental losses offsetting other income: Using rental losses to reduce taxes on W-2 or business income draws scrutiny.
Building an Audit-Ready Documentation File
Create a permanent file for each property containing:
- Purchase documentation: closing statement, purchase contract, title insurance
- Placed-in-service proof: photos, listings, inspection reports, certificate of occupancy
- Depreciation schedules: annual calculations showing method, recovery period, and convention used
- Improvement records: invoices, contracts, and placed-in-service dates for each addition
Depreciation Recapture and Your Placed-in-Service Records
When you sell a property for more than its depreciated basis, you’ll owe depreciation recapture tax on the depreciation you claimed over the years. Accurate placed-in-service records calculate exactly how much depreciation you took—and how much you’ll pay back at sale.
Common Placed-in-Service Documentation Mistakes to Avoid
No Separation Between Land and Building Values
Failing to allocate purchase price between land and building means the IRS can challenge your entire depreciation deduction.
Missing Records for Capital Improvements
Each improvement requires its own documentation. Without it, you cannot prove the placed-in-service date or defend the deduction.
Inconsistent Tracking Across Multiple Properties
Real estate investors with portfolios often mix records or use inconsistent methods across properties, creating reconciliation problems during audits.
Using Purchase Price Without Appraisal Support
The IRS can challenge arbitrary land/building splits. Professional appraisals or reasonable allocation methods based on tax assessments protect your position.
How Strategic Depreciation Bookkeeping Builds Real Estate Wealth
Defending depreciation deductions isn’t just about surviving audits—it’s about keeping more cash available for reinvestment and growth. Every dollar saved through proper depreciation is a dollar that can fund your next acquisition, improvement, or opportunity.
When your records are clean and your placed-in-service dates are documented, you can confidently claim every deduction you’re entitled to without worrying about what happens if the IRS comes knocking.
Talk to an expert at Bennett Financials to ensure your real estate bookkeeping supports both audit defense and long-term wealth building.
