When to Depreciate an Asset: Placed-in-Service Date and Conventions

You start depreciating an asset the day it’s ready and available for use in your business, not the day you pay for it or take delivery, and you stop when you’ve deducted the full cost or the asset leaves business service. That “ready and available” date is what the IRS calls the placed-in-service date, and it controls both which tax year your deductions begin and how much of a first-year deduction you get. Deciding when to depreciate an asset comes down to pinning that date correctly, applying the right convention for the partial first year, and knowing which later events end the deductions early.

Does the Asset Qualify in the First Place

Timing only matters if the property is depreciable to begin with. Four requirements have to be met: you own it, you use it in a business or income-producing activity, it has a useful life longer than one year, and it wears out, decays, gets used up, or loses value over time.¹ Property financed with a loan still counts as owned for this purpose.

Land fails the wear-and-tear test and can’t be depreciated, so when you buy real estate you have to allocate the price between the land and the building and only depreciate the building portion.¹ Inventory is deducted through cost of goods sold, not depreciated. Personal-use property doesn’t qualify unless and until you convert it to business use. And if you acquire and dispose of an asset in the same tax year, no depreciation is allowed at all.²

The Start Date: Placed in Service

Depreciation begins when the property is placed in service, meaning it is ready and available for its intended function.¹ Purchase date and payment date don’t matter. Buy a CNC machine in November that needs specialized wiring finished in February, and February is your placed-in-service date. The machine wasn’t operational until then.

The asset doesn’t need to be actively earning revenue. It just has to be available. A landlord who finishes renovating a rental house in December and lists it for rent has placed that property in service in December, even if no tenant moves in until January.³ A backup delivery van kept road-ready in the lot is in service, even on days it doesn’t leave.

Getting this date wrong has consequences. Misreporting the placed-in-service date can lead to disallowed deductions and a 20-percent accuracy-related penalty on the resulting underpayment.⁴ Keep the installation logs, contractor sign-offs, and rental listings that prove when the asset actually became available for use.

How the First Year Is Prorated

You won’t get a full year of deductions in the year you place an asset in service. The IRS doesn’t prorate by exact days either. Instead, three conventions standardize the first-year and final-year calculations, and which one applies depends on the property type and when during the year it entered service.

Half-Year Convention

The default for most personal property — equipment, vehicles, furniture — treats every asset as placed in service at the midpoint of the tax year regardless of the actual month.¹ You get half a year of depreciation in year one and half a year in the final recovery year. A $50,000 machine placed in service in March produces the same first-year deduction as one placed in service in October.

Mid-Quarter Convention

The half-year convention gets overridden when more than 40 percent of the total basis of personal property you placed in service during the year was placed in service in the last three months.⁵ When that happens, every piece of personal property placed in service that year switches to the mid-quarter method. Each asset is treated as placed in service at the midpoint of its actual quarter, which shrinks the first-year deduction for fourth-quarter purchases. Residential rental property, nonresidential real property, and railroad gradings are excluded from the 40-percent test.

Mid-Month Convention

Residential rental property and nonresidential real property always use the mid-month convention. A building is treated as placed in service at the midpoint of the month it actually enters use.⁶ A rental placed in service on July 1 and one placed in service on July 28 both start depreciating from the middle of July.

When Depreciation Ends

Two events stop depreciation. The first is full cost recovery. Once your accumulated deductions equal the depreciable basis, you’re done, even if the equipment is still running and producing revenue.⁶

The second is the asset leaving business service before you’ve recovered the full cost. That covers selling it, trading it, abandoning it, or losing it to a casualty. Depreciation ends in the year of disposition, and the applicable convention determines how much of the final year’s deduction you can take. Sales and other dispositions get reported on Form 4797.⁷

There’s a quieter trigger too. If you stop using the property for business or income production, deductions end even without a sale. A rental you move back into as your personal residence is no longer in service. The placed-in-service rule runs in reverse: once the asset is no longer available for a business function, depreciation stops.

Speeding Up the Timeline: Section 179 and Bonus Depreciation

You aren’t required to spread the cost across the full recovery period. Two provisions let you pull most or all of the deduction into the placed-in-service year itself.

Section 179 Expensing

For tax years beginning in 2026, you can elect to expense up to $2,560,000 of qualifying property in the year it’s placed in service. That limit phases out dollar for dollar once total qualifying purchases exceed $4,090,000, and sport utility vehicles have a separate $32,000 cap.⁸ The deduction can’t exceed your taxable income from active business operations, so it can’t create or increase a net loss. Amounts you can’t use carry forward.

The catch: if business use later drops to 50 percent or below, you have to recapture the deduction as ordinary income.

Bonus Depreciation

The One Big Beautiful Bill Act permanently restored 100-percent bonus depreciation for qualified property acquired and placed in service after January 19, 2025.⁹ For assets placed in service during 2026, you can deduct the entire adjusted basis in the first year.¹⁰ Qualified property generally includes new or used tangible assets with a recovery period of 20 years or less. Unlike Section 179, bonus depreciation can create or increase a net operating loss.

You can elect out of bonus depreciation for an entire class of property in a given year if a slower timeline works better for your situation. The election applies to the whole class, not individual assets.

Timing Situations That Trip People Up

Converting Personal Property to Business Use

When you move a personal asset into business service — a car shifting to full-time business driving, a home becoming a rental — the depreciation clock starts on the conversion date. Your depreciable basis is the lesser of the property’s fair market value on the conversion date or your adjusted basis at that time, meaning original cost plus improvements minus any casualty loss deductions.¹

If you bought your home for $300,000 and it’s worth $250,000 when you convert it to a rental, your depreciable basis for the structure is based on the $250,000 value. The IRS won’t let you depreciate a decline that happened while the property was personal-use. If instead the home appreciated to $350,000, you’d use the $300,000 adjusted basis rather than the higher market value.

Listed Property Falling Below 50 Percent Business Use

Passenger vehicles and other “listed property” carry an ongoing test. If business use drops to 50 percent or below after the placed-in-service year, you have to recapture the excess depreciation — the difference between what you claimed under the accelerated method and what straight-line ADS would have allowed — and switch to straight-line ADS for all future years.¹ The recaptured amount goes on Form 4797 as ordinary income. If business use was already 50 percent or below in year one, you never qualified for accelerated depreciation or Section 179 to begin with, and straight-line ADS applies from day one.

Intangibles Follow a Different Track

Goodwill, trademarks, customer lists, patents, franchises, and non-compete agreements acquired in connection with a business fall under Section 197 and are amortized on a straight-line basis over 15 years from the month of acquisition.¹¹ Neither Section 179 nor bonus depreciation applies. If a business purchase includes goodwill, the 15-year clock starts in the month the deal closes.

What Happens to Depreciation When You Sell

The end of depreciation isn’t quite the end of the story. When you sell a depreciated asset at a gain, the IRS recaptures the tax benefit, and the rules split by asset type.

For equipment, vehicles, and other tangible personal property, gain up to the amount of depreciation previously claimed is taxed as ordinary income rather than at capital gains rates.¹² Buy a truck for $60,000, claim $40,000 in depreciation to reach a $20,000 adjusted basis, sell for $35,000, and the entire $15,000 gain is ordinary income because it falls within the depreciation taken.

For buildings, the portion of gain attributable to depreciation — unrecaptured Section 1250 gain — is taxed at a maximum rate of 25 percent instead of ordinary income rates, with any remaining gain taxed as long-term capital gain.¹³ Recapture applies regardless of how long you held the property, and both types are reported on Form 4797.⁷

1
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
2
Internal Revenue Service. Topic No. 704, Depreciation
3
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
4
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
5
eCFR. 26 CFR 1.168(d)-1 – Applicable Conventions, Half-Year and Mid-Quarter Conventions
6
Internal Revenue Service. 2025 Instructions for Form 4562 – Depreciation and Amortization
7
Internal Revenue Service. Instructions for Form 4797 (2025)
8
Internal Revenue Service. Rev. Proc. 2025-32 – Inflation Adjusted Items for Taxable Years Beginning in 2026
9
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
10
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
11
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
12
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
13
Internal Revenue Service. Topic No. 409, Capital Gains and Losses