Document basis and the placed-in-service date
Your depreciable basis and the placed-in-service date are determined once — when you acquire and prepare the property for rental. Establish both precisely. Basis includes the purchase price, buyer's closing costs (title, attorney, recording fees), and any pre-rental improvements. Exclude land, which is not depreciable.
Get a land-to-building allocation from the county assessor's assessed values, an appraisal, or a cost segregation study. A low land allocation (defensible) means a higher depreciable basis and more annual deductions. The placed-in-service date is when the property was ready and available for rent — not necessarily when the first tenant moved in.
Elect the safe harbors
In year one, make the safe harbor elections that reduce your depreciation complexity going forward. The de minimis safe harbor ($2,500 per item) lets you expense small purchases immediately instead of depreciating them. The small taxpayer safe harbor (for buildings with a basis of $1 million or less) caps annual improvements at the lesser of 2% of the basis or $10,000, all expensed currently.
These elections are attached to your return and must be made on a timely filed return (or extension). You cannot retroactively elect them after the filing deadline. Year one is also the right time to establish a written expensing policy for the de minimis safe harbor.
Consider a cost segregation study
A cost segregation study in year one unlocks the maximum benefit — all prior-year catch-up and all future depreciation on the reclassified assets. For residential rentals above roughly $500,000 and commercial above $750,000, the study cost is usually recovered in the first year's tax savings.
If you're buying in the fourth quarter, coordinate the placed-in-service date with your tax advisor — the mid-month convention means you get a half-month of depreciation regardless of the exact date, but year-end placement affects when bonus depreciation kicks in on cost-segregated assets.
Frequently asked questions
When does depreciation start on a new rental?
When the property is placed in service — ready and available for rent. This is not the closing date if the property needed rehabilitation before it could be rented.
What is the best way to allocate land and building value?
The county assessor's land-to-improvement ratio is the most common method. An appraisal is more defensible for high-value properties. The allocation can also come from a cost segregation study.
Can I do a cost seg on a property I just bought?
Yes — in fact, year of acquisition is the optimal time. You can expense the reclassified assets immediately with bonus depreciation and start the new depreciation schedules fresh.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.