I have a rental property, that was in service prior to needing the furnace replaced. I understand that the furnace is an improvement, not a repair and will have to be depreciated, but I have a question about which year applies. I have a receipt dated 12/23 for the purchase and installation of the furnace; however, the payment was not made until January. I would like to confirm that the depreciation should start on the installation date. Is this correct?
You typically expense an asset for business use or begin depreciation deductions when you actually pay for the asset if you are a cash basis taxpayer.
Depreciation starts on the date the asset is placed "in service". Period. It does not matter when it was installed, or when you paid for it. Depreciation starts on the date it's placed "in service" as a rental asset.
I agree that, in this particular instance, when the installation date (and presumably placed-in-service date) are close to the end of the year, that depreciation could begin on December 23rd.
However, if an asset is never paid for, then there is no cost basis for depreciation regardless of when it was placed in service.
However, if an asset is never paid for, then there is no cost basis for depreciation regardless of when it was placed in service.
Huh? Who said the asset was never paid for? It wasn't free.
begin depreciation deductions when you actually pay for the asset if you are a cash basis taxpayer.
Nope, that's not right. If the bill is due 5 years from the date placed in service and is not paid until it's due, you still depreciate on the cost of the asset on the date it's placed in service. It does not matter when you actually pay for it.
You start depreciation on the actually property itself on the date placed in service, even if your first mortgage payment isn't due until 90 days after it's placed in service. No different for any other asset.
If a taxpayer never pays for an asset, then that asset has no cost basis.
If the furnace (or any other asset) is "placed in service" (which I would assume it was installed and is operational not just decorative) and it is "paid for" in some fashion ( paid by CC, loan, installments, etc) then it is deducted in that tax year. Even if you default on the loan or never pay off the CC or go bankrupt the unit is still considered paid for thus it is an asset to be depreciated or expensed.
If a taxpayer never pays for an asset, then that asset has no cost basis.
Not so. If I never pay for the furnace, then at an absolute minimum I can expect the supplier/installer to place a lien on the property if they can't outright get a court order allowing them to uninstall and repossess the furnace.
@Carl wrote:
If a taxpayer never pays for an asset, then that asset has no cost basis.
Not so. If I never pay for the furnace....
That was not what I was referring to initially, which was expensing an item that was never paid for, either in cash or via some sort of debt.
Cash basis taxpayers need to pay for an asset, one way or the other, before they can deduct the asset as an expense.
@Critter-3's post is correct in terms of an asset being placed in service and depreciated.