Closing on a rental in December?

Question

This comes up every single fall, so I figured I'd throw it out here.

Somebody calls me in November. They're under contract on a rental, closing mid-December, and they want the depreciation (or the cost seg) on this year's return. Great. Then I ask what shape the place is in, and it's a gut job. No kitchen, roof's shot, nobody's living there until March.

That's the problem. Depreciation doesn't start the day you close. It starts when the property is placed in service, which basically means it's ready and available to rent. A house nobody can live in yet usually isn't there. So the deduction they were counting on this year shows up next year instead.

Not the end of the world, and sometimes next year is actually the better year to have it. But I'd rather people know in October than find out in April.

If this year matters to you, buy something rent-ready or with a tenant already in it, get it listed the day it's livable, and save something that proves the date.

Anybody closing on something before year end? Are you pushing to get it rent-ready by December 31, or just letting it land in next year?

Sagiv O. · Answer

Good thread. One cost-seg-specific piece that flips Sabbir's math: with plain 27.5-year straight-line, December vs. January is nearly nothing — but if you're doing a cost seg with bonus depreciation, the year DOES matter, because the bonus percentage is claimed in the placed-in-service year. A 5-year component gets its bonus in 2026 if it's rent-ready by 12/31, or 2027 if not.

The part most people don't realize: you don't need the study finished by December 31. Placed-in-service is the only deadline that actually matters. A retroactive study done a year or two later — claimed through a Form 3115 catch-up — still ties the bonus to the original placed-in-service year.

So the sprint is just: get it rent-ready by 12/31, build the paper trail Simon mentioned, and book the study when you have time to do it right.

Sabbir Ahamed · Answer

Great reminder. One thing worth adding for anyone who isn’t doing cost seg or bonus: with a plain 27.5-year straight line, “missing” December costs much less than people expect because of the mid-month convention.

From the IRS residential table (Pub 946, Table A-6):

• Placed in service in December: 0.152% of the building basis in year one
• Placed in service in January: 3.485% in year one

Placed in service in December: 0.152% of the building basis in year one

Placed in service in January: 3.485% in year one

On a $285,600 building basis (a $350k purchase plus $7k closing, 20% land):

• Ready in December 2026: about $434 of depreciation on the 2026 return
• Ready in January 2027: about $9,953 on the 2027 return

Ready in December 2026: about $434 of depreciation on the 2026 return

Ready in January 2027: about $9,953 on the 2027 return

So for a straight-line rental, pushing placed-in-service into January mostly moves a few hundred dollars. The real money in “this year vs. next year” is in cost seg and bonus, where the whole first-year amount depends on the placed-in-service date. That’s when the paper trail Simon mentioned really matters.

Agree 100% on the rehab costs: getting a gut job rentable usually gets capitalized into basis, not expensed.

Simon W. · Answer

Good post. The thing I'd add is the paper trail, because two years from now nobody remembers what date the place was actually ready.

Save the listing with a date on it, the first showing or application, and the lease or first booking. A dated photo of the finished unit helps too. That's what shows when it was really available to rent.

And keep the rehab costs separate from day one. What you spend getting a gut job rentable usually gets added to the cost of the property and depreciated, not written off as repairs that year. People see a big pile of Home Depot receipts in December and expect a big deduction, and it doesn't work that way. If the costs are already split out by job when your CPA gets them, the depreciation schedule is a lot easier to get right.

Aaron Zimmerman · Answer

Totally agreed. And to add, if you have a STR, make sure you have at least two stays!

Closing on a rental in December?

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