Knowing When a Rental Property is Placed in Service is Key to Claiming Bonus Depreciation by Angie Adames, CPA
Posted on July 16, 2025
by
Angie Adames
The expansion and permanent reinstatement of 100 percent bonus depreciation under the One Big Beautiful Bill Act (OBBBA) is a welcome change for rental real estate developers and owners, who can once again write off a larger portion of their costs for qualifying business assets upfront rather than spreading them out over the property’s useful lives. However, to maximize these tax savings opportunities, property owners must understand the definition of the “placed in service” date and plan for it accordingly.
Bonus depreciation allows taxpayers to claim a full first-year deduction for the costs of qualifying new and used property that they place in service, rather than spreading the deduction over up to 20 years. It provides immediate tax savings that can reduce current-year tax liabilities and free up capital for taxpayers to invest in new equipment and property improvements that can boost future profitability. It also enables taxpayers to create a net operating loss (NOL) they can carry forward and use to offset income in future years.
Under the new law, bonus depreciation applies to qualifying property placed in service after January 19, 2025. Previously, the deduction was limited to 40 percent in 2025 with a planned phaseout by 2027.
Qualifying Property
To qualify for 100 percent bonus depreciation, property must be used for business purposes or as an income-producing activity. More specifically, eligible property is limited to:
- Tangible personal property with a useful life of 20 years or less, including furniture and appliances
- Qualified improvement property (QIP), which refers to interior improvements made to non-residential buildings after the building was first placed in service and includes carpet and flooring, drywall, acoustic ceilings, interior doors, plumbing, fire protection and electrical systems
- Land improvements, including parking, landscaping and exterior lighting
The new law also introduces a fourth category of bonus depreciation-eligible property to include qualified production property (QPP), which is defined as nonresidential real property used in manufacturing, production or refining tangible personal property in the U.S. or a U.S. territory.
Timing Considerations
As indicated by the language of the tax laws, the availability of bonus depreciation is limited to the year the taxpayer puts qualifying property into service. Nevertheless, determining this date for each segment of a large project can be challenging, especially when the project involves a series of completion dates.
Contrary to popular opinion, the placed-in-service date is not the day a building receives a certificate of occupancy (CO) nor is it the date of acquisition. Rather, the U.S. Treasury consider the placed-in-service date to be when the property is “first placed in a condition or state of readiness and availability for a specifically assigned function.” The IRS tends to interpret the definition more narrowly, requiring the property to be “ready and available for regular operation and income-producing use,” which occurs when the following milestones are met:
- the property receives approval of all required licenses and permits,
- it completes critical tests,
- it commences daily or regular operation, and
- control of the property passes to the taxpayer.
Despite these parameters, there are instances when the U.S. courts considered the “placed in service” to include the date the property is open for business. For example, in Stine, LLC v. United States, the court ruled that a taxpayer could begin deducting depreciation on a retail store when the property received a certificate of occupancy and was “in a condition of readiness and availability” even though it was not yet officially open to the public. Although the court’s opinion opened the door for taxpayers to accelerate a “placed in service” date, the IRS later announced it would not comply with the court’s ruling and would continue to litigate the issue.
Property owners should consult with tax advisors experienced in real estate matters to properly assess whether their projects satisfy the IRS’s narrow definition of placed in service. It is also recommended that they conduct cost segregation studies to help identify all the various elements of their properties that can qualify for bonus depreciation, along with a timeline for accelerating those deductions over a project’s lifecycle.
About the Author: Angie Adames, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she provides tax and consulting services to real estate companies, manufacturers and closely held entities. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
← Previous
