Depreciate if no income?

12 Replies

Hi BPers,

My brother @Joshua Smith has a property which he purchased in May 2017, but has been design and in permitting (a complete nightmare) for the remainder of the year. Therefore, it hasn't made any revenue, as in rent, for the year of 2017. We're wondering, can the asset still be depreciated if it has produced no income for the year. Furthermore, if it can be, can we add things like architect fees, condo conversion fees, permitting fees to the basis?

Thanks in advance,


Yes, it would be what we investors call a tax shelter. If it’s residential (condo?) then you can depreciate the house (but not the land) over 27.5 years. For example if he paid 325k and the land is worth 50k he could depreciate $275k over 27.5 years or $10k/ year. If he held from January he would have $10k depreciation expense plus any of his deductible expenses. Many of the improvements would also be losses but most need to be expended over the life of the improvement. So hopefully he needs these “losses” to offset income from 2017. This is my understanding do don’t forget to seek advise from your cpa. I’m sure others will chime in to correct any of my misconceptions. Real estate is awesome because it helps cut the bill from the taxman!

Depreciation starts when the asset is "placed in service" which for a rental property is when it's ready to be rented. Sounds like you're not there yet so there wouldn't be any depreciation yet. 

Its not entirely clear from your factual description whether or not the property was actually placed in service during any part of 2017. 

@Paul Caputo , @Christopher Smith , The property was occupied by the tenant for the first month of ownership, however, she didn't pay any rent (was part of the deal). We do have documentation of her move out date. I wonder if this counts as 'in service'

I’m pretty sure you have to have it “in service”. Now if nobody rents it I think you can still depreciate it. So those vacant units (that are rentable) in vacation-rental markets are still eligible. But if it’s not in rentable condition I think you’re stuck. That said, I’m no CPA so take my opinion for the grain of salt that it’s worth.

You should be fine so long as the property was "in service", meaning that it could be rented. Making improvements to a property doesn't have to mean that the property was "out of service", depending on the nature of the improvements. I have done kitchen & bath improvements, including an entire bath redo, with tenants in a house. Everything boils down to what you can reasonably prove if you are audited. If you have a house that's gutted, without any heat or walls, you're not going to be able to claim that was in service. 

I will link @Natalie Kolodij @Brandon Hall @Linda Weygant and they will give you the tax guru advice :)

You start depreciating  once the property is in service.

It sounds like the costs incurred were pre-service as well - I would roll all those architect fees, condo fees ect into the basis and depreciate once it becomes rented

@Aaron Smith that's a tricky one. I'm guessing the property was already rented by the previous tenant and you gave her the last month free to move out so you could start renovating. So it would've technically been in service from closing since it was already rented at that point. If it was still "rentable" (could be rented whether or not it actually is) after that it's still in service, if it's not rentable then it'd be out of service until it is again rentable. You definitely need to talk to your CPA to figure this one out. If I get some time I'll lookup if there's any guidance in the IRS publications on this matter. Any thoughts on that @Natalie Kolodij ?

It is a tricky situation @Paul Caputo  

Honestly- I can see it argued either way. So depending on his risk adversity here....he could play it either way and just be prepared if he goes more aggressive, it may throw a red flag. 

Available and ready for use.....

It's actively being rented- so it appears to be rentable. In living condition. Ect. could be argued it was in service day 1. 

However- It was occupied by a non-paying tenant, and was tied up in permits.

I'd say it's a "walk through with your tax pro" Situation. Run the numbers. It's a month's difference. Have them figure the tax savings on taking the more aggressive stance of allowing all those expenses via in service vs. needing to capitalize if not in service. 

Sometimes people want to play it aggressive with tax strategy...and It would save them like...$12 in tax. And I'm like..ugh, can we just not? 

Risk needs to warrant the reward. 

Thanks everyone for all of your advice. 

@Aaron Smith

I am not a CPA.  If you claim the property was in service, how will you prove it when you are audited?  If you did not have a lease with your previous "tenant" and did not advertise the property for rent when that "tenant"  vacated, then you are hard pressed to prove the property was ever in service.  I would take the conservative route and just capitalize all the make ready costs.

I took a quick look at Pub. 527 and looks like you'll be waiting until it's ready to rent, not starting at closing. 

The exact wording is:"You begin to depreciate your rental property when you place it in service for the production of income." and "You place property in service in a rental activity when it is ready and available for a specific use in that activity." 

 Sounds like it wasn't producing income and it wasn't really ready and available that first month either. Would be a different story if you kept it rented to same tenant and then a year later you do the remodel, but in this case I'd say wait until it's ready to start the depreciation clock.

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