Do You Depreciate Construction in Progress? Rules and Timing

Depreciating construction in progress is not allowed under the tax code, because an asset that is still being built has not yet been placed in service. Until the finished property is ready and available for its intended use, the money spent on it accumulates in a construction-in-progress account on the balance sheet and sits there without generating any depreciation deduction. Once the asset crosses the placed-in-service line, that accumulated balance becomes the depreciable basis and the recovery clock starts.

When Depreciation Actually Starts

The IRS defines the placed-in-service date as the moment property is “ready and available for a specific use,” whether in a business, an income-producing activity, or a personal activity.¹ A structure that is physically standing but still lacks a certificate of occupancy, working utilities, or required safety inspections has not crossed that line. Every condition needed for actual use has to be satisfied first.

The timing matters because the rule prevents businesses from claiming deductions before an asset contributes to operations. Finish a warehouse in March, wait until June for the occupancy permit, and June is when depreciation begins. The three months in between produce no deduction, even though the building looks done.

What Sits in the Construction in Progress Account

Every dollar directly tied to bringing the asset into existence gets capitalized rather than deducted as a current expense. IRS Publication 551 identifies the categories that form the asset’s basis when you build property or have it built for you:²

Land, including the purchase price of the lot plus clearing and grading
Labor and materials — wages (reduced by any employment credits) and supplies like lumber, steel, and concrete
Architect, engineering, and inspection fees
Building permits and government filing fees
Payments to general and specialty contractors
Equipment rental, and depreciation and maintenance on owned equipment used for the build

If you use your own employees, materials, or equipment to build the asset, those costs cannot be deducted as ordinary business expenses during construction. They go into basis instead.²

Interest on Construction Debt

Interest on money borrowed to fund the project is not always deductible as it accrues. Under the uniform capitalization rules, interest paid or incurred during the production period must be added to the asset’s basis when the property meets any one of these tests:³

The property is real estate, or has a class life of 20 years or more
The estimated construction timeline exceeds two years
The estimated construction timeline exceeds one year and total cost exceeds $1,000,000

Because nearly all buildings qualify as real property, most commercial construction projects trigger mandatory interest capitalization. The production period runs from the date construction begins through the date the property is ready to be placed in service.³ Capitalized interest is recovered through depreciation over the life of the asset rather than deducted in the year paid.

Transferring the Balance to a Fixed Asset Account

When the project is finished and the asset is placed in service, you close out the construction in progress account by moving the accumulated balance to the appropriate fixed asset category: Buildings, Machinery, or Land Improvements, depending on what was built. That transfer is the administrative cutoff between accumulating costs and recovering them.

Splitting Out the Land

Land itself can never be depreciated because it does not wear out or become obsolete.¹ When a project includes both a building and the lot beneath it, the total cost has to be allocated between the two. The land portion sits on the balance sheet permanently without producing depreciation.

Some site work qualifies as a depreciable land improvement rather than part of the land. Fences, roads, sidewalks, and bridges are treated as 15-year property under MACRS.¹ General clearing, grading, and landscaping costs are typically added to the land itself and cannot be depreciated, unless they are so closely tied to another depreciable asset that their useful life can be measured alongside it.

Additions to Existing Property

If the project is an addition or improvement to an asset you already own, the improvement is treated as its own depreciable property with its own recovery period.¹ The recovery period and method match what would apply if the original property had been placed in service on the same date as the improvement. Two depreciation schedules can run for the same physical structure — one for the original, one for the addition.

Recovery Periods and First-Year Conventions

Once the asset is placed in service, the recovery period is set by the property class. The most common classes for constructed assets are:⁴

Residential rental property: 27.5 years
Nonresidential real property: 39 years
Land improvements such as fences, roads, and sidewalks: 15 years
Certain equipment and machinery: 5 or 7 years, depending on type

How much you claim in year one depends on the applicable convention. Real property uses the mid-month convention, treating the asset as placed in service at the midpoint of the month it entered service.⁴ An October placed-in-service date produces one and a half months of first-year depreciation.

Most other tangible property uses the half-year convention, which treats the asset as placed in service at the midpoint of the tax year regardless of the actual date. One exception: if more than 40 percent of your total depreciable property for the year is placed in service during the last three months, a mid-quarter convention applies instead, spreading the first-year deduction based on the quarter the asset entered service.⁴

Accelerated Options for 2026 Placements

Placing a completed asset in service in 2026 opens two paths to faster cost recovery than standard MACRS.

100 Percent Bonus Depreciation

The One, Big, Beautiful Bill Act replaced the previously scheduled phase-down of bonus depreciation with a permanent 100 percent first-year deduction for qualified property acquired after January 19, 2025.⁵ For eligible assets placed in service in 2026, the entire cost can be deducted in year one rather than spread across the recovery period. Bonus depreciation applies to new tangible personal property such as equipment, machinery, and certain land improvements, along with qualified improvement property. It does not apply to buildings classified as residential rental or nonresidential real property; those still follow the standard 27.5-year or 39-year schedule.

Section 179 Expensing

Section 179 allows immediate deduction of qualifying property rather than depreciation over time. The base deduction limit and phase-out threshold are adjusted annually for inflation.⁶ For 2026, the adjusted maximum deduction is approximately $2,560,000, and the phase-out begins when total qualifying property placed in service during the year exceeds approximately $4,090,000.

Section 179 covers most tangible personal property and certain categories of real property improvements, including roofs, HVAC systems, fire protection and alarm systems, and security systems.⁶ If those components are part of a construction project, they can be expensed immediately instead of depreciated over 15 or 39 years.

When Only Part of the Project Is Finished

A project does not have to be entirely complete before depreciation can start on the finished pieces. When a distinct portion — an individual building, a separate wing, a standalone unit — is ready and available for its intended use, that portion can be placed in service and depreciated while construction continues on the rest.¹ Each completed portion gets its own placed-in-service date and its own schedule. Costs still tied to unfinished portions stay in the construction in progress account.

If the Project Is Abandoned or Demolished

Not every project reaches a placed-in-service date, and the tax treatment splits sharply depending on why.

Abandonment

Permanent abandonment of a construction project produces a deductible ordinary loss for the costs sitting in the construction in progress account. Because the loss is ordinary rather than capital, it offsets regular business income dollar for dollar without being subject to the capital loss limitations.⁷ The deduction is allowed in the tax year the loss is sustained, meaning the year you make a clear, identifiable decision to walk away with no intent to resume.⁸

Demolition

Demolishing a partially completed or existing structure works differently. Neither the cost of the demolition itself nor any loss from tearing down the building can be deducted. Both amounts are added to the basis of the underlying land.⁹ Since land is not depreciable, those costs are recovered only when the property is eventually sold. Abandoning a project produces an immediate deduction; demolishing a structure produces none.

1
Internal Revenue Service. Publication 946, How To Depreciate Property
2
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
3
Office of the Law Revision Counsel. 26 U.S. Code 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses
4
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
5
IRS.gov. Interim Guidance on Additional First Year Depreciation Deduction Under Section 168(k)
6
Office of the Law Revision Counsel. 26 U.S. Code 179 – Election to Expense Certain Depreciable Business Assets
7
Internal Revenue Service. Instructions for Form 4797 – Sales of Business Property
8
Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses
9
Office of the Law Revision Counsel. 26 U.S. Code 280B – Demolition of Structures