Buying Real Estate Before Year-End? Closing Isn’t the Finish Line for Tax Purposes
By Cody Heimerdinger, CPA, Director
As we move toward the end of the year, real estate investors often begin thinking about one question: “If I buy the property before December 31, can I deduct depreciation this year?” Sometimes the answer is yes. But simply getting the keys before year-end does not necessarily get you there.
Closing Date vs. Placed-in-Service Date
For federal income tax purposes, an important date is not merely when you purchase or close on a property. It is when the property is placed in service. That distinction can become especially important when a taxpayer purchases a rental property late in the year and intends to perform repairs, renovations, furnishing, or other work before tenants can actually use it.
What Does “Placed in Service” Mean?
Generally, depreciation begins when property is ready and available for its intended use. For rental real estate, the IRS explains that a property is placed in service when it is ready and available for rent. The property does not necessarily need to have an actual tenant occupying it yet.
Consider two taxpayers who each purchase a rental property on November 15.
Taxpayer A purchases a house that is already in rentable condition. The taxpayer performs some cleaning, takes photographs, lists the house for rent on December 1, and begins accepting rental inquiries.
Taxpayer B purchases a similar house but discovers that it needs substantial work. The kitchen is removed, flooring is replaced, plumbing work is performed, and the property is not ready to be rented until February of the following year.
Both taxpayers closed on their properties during the same year. But they may have very different depreciation start dates. Taxpayer A may have placed the property in service in December, while Taxpayer B may not place the property in service until the following February. The closing date alone does not answer the question.
You Do Not Necessarily Need a Tenant
This is another important distinction. A rental property generally does not need to be occupied before it can be considered placed in service. Suppose you finish preparing a rental property on December 15, engage a property manager, list the property on the market, and make it genuinely available for rent. The first tenant does not move in until January.
That does not automatically mean you must wait until January to begin depreciation. The IRS provides examples illustrating that a rental property can be placed in service once it is ready and available for rent, even if a tenant begins occupying it later. The key is whether the property was actually ready and available for its intended income-producing use.
Simply intending to rent the property sometime in the future is different from having it ready for the marketplace.
Repairs and Renovations Can Change the Timeline
This is where year-end planning becomes more complicated.
It is common to purchase an investment property and immediately begin spending money on it. Those expenditures might include:
- Painting and cleaning;
- Flooring;
- Appliances;
- Furniture;
- Roof or HVAC work;
- Kitchen or bathroom renovations;
- Electrical or plumbing upgrades;
- Landscaping;
- Structural improvements; or
- Converting the property to a different use.
The extent and nature of the work matter. If a property requires significant renovation before it is suitable for rental use, those facts may indicate that the property has not yet been placed in service. There is also a separate question: Are the costs currently deductible repairs, or must they be capitalized as improvements?
The tax rules distinguish ordinary repair and maintenance expenditures from improvements that better the property, restore it, or adapt it to a new or different use. Whether an expenditure must be capitalized is generally based on the particular facts and circumstances. That means the year-end tax analysis cannot simply be: “I spent $75,000 fixing the property, so I have a $75,000 deduction.” Some expenditures may be deductible. Others may become part of the depreciable basis of the building or separate assets. And some costs incurred before the property is operational may need to be analyzed differently altogether.
Why the Date Matters More Under Current Depreciation Rules
The placed-in-service date can also affect deductions for property acquired along with or installed in the building. Current federal law provides 100% bonus depreciation for certain qualified property acquired and placed in service after January 19, 2025.
The building itself generally will not qualify for bonus depreciation simply because it was recently purchased. But a real estate acquisition may contain shorter-lived assets that could potentially qualify. For example, depending on the facts, certain property, such as (1) appliances; (2) furniture; (3) equipment; (4) flooring; (5) land improvements; and (6) other shorter-loved property may have different depreciable lives than the building itself.
This is one reason a cost segregation study may become relevant in connection with a significant real estate acquisition. A cost segregation analysis attempts to identify portions of the acquisition or construction cost that properly belong in shorter-life asset classifications rather than remaining entirely within the longer depreciable life assigned to the building. But there is still an important prerequisite:
The assets generally need to be placed in service before depreciation begins. Buying a property on December 29 and planning a cost segregation study does not, by itself, establish a December placed-in-service date if the property will remain under renovation for several more months.
Short-Term Rentals Add Another Layer. Short-term rental properties can require additional analysis. A taxpayer purchasing a property for use as an Airbnb, VRBO, or other transient rental should not automatically assume that every tax rule applicable to a conventional long-term residential rental will apply in exactly the same manner. The property’s use, average rental period, services provided to guests, degree of taxpayer participation, and nature of the property can affect several areas of the tax return. Accordingly, when purchasing a short-term rental near year-end, questions such as these become particularly important:
When was the property actually ready for guests?
When was it listed and available for booking?
Was the property still being substantially renovated?
Were furnishings and necessary equipment installed?
Could a guest realistically have occupied the property before year-end?
Those facts may prove much more meaningful than the date printed on the settlement statement.
Documentation Is Your Friend
A placed-in-service determination is ultimately based on facts, so contemporaneous documentation can be extremely helpful.
For a year-end rental acquisition, consider retaining records such as:
- The final buyer’s settlement statement;
- Invoices for repairs and improvements;
- Contractor completion dates;
- Photographs showing the property’s condition;
- Appliance and furniture installation records;
- Property management agreements;
- Rental advertisements;
- Airbnb, VRBO, or other listing activation dates;
- Dates on which reservations first became available; and
- Communications showing when the property became available to prospective tenants.
If a return is examined several years later, reconstructing whether a property was truly ready for rent on December 28 versus January 12 can be difficult. A folder containing contemporaneous documentation can make that analysis much easier.
Year-End Planning Should Happen Before the Closing
The bigger lesson is that year-end real estate planning should not begin after the return is prepared. If you are considering purchasing an investment property before December 31, it can be helpful to discuss the transaction with your tax advisor before the acquisition and renovation timeline is finalized. Some of the questions we may want to understand include:
What type of property are you purchasing?
- How will it be used?
- What repairs or improvements are necessary?
- When do you expect those projects to be completed?
- When will the property actually become available for tenants or guests?
- What furniture, equipment, or other depreciable assets are being acquired?
- Would a cost segregation study make economic sense?
- What deductions are you expecting from the acquisition, and are those expectations realistic?
Those discussions can help us project not simply what the property costs, but what tax benefits may actually be available — and when.
Buying rental real estate before year-end can create meaningful tax planning opportunities. But “I closed before December 31” is not the same thing as “I placed the property in service before December 31.” The distinction can affect when depreciation begins, how acquisition and renovation expenditures are treated, and when accelerated depreciation opportunities may become available. Before racing to close a real estate transaction solely to capture a current-year tax deduction, take a closer look at what will happen after the closing. Because for tax purposes, getting the keys may only be the beginning. Considering a real estate acquisition before year-end? Keystone CPAs can help evaluate the acquisition, renovation timeline, placed-in-service date, depreciation options, and other planning opportunities before year-end so there are fewer surprises when it is time to prepare the tax return.