Can You Claim Bonus Depreciation on a Converted Rental Property? A Key Tax Rule Explained

For real estate investors, maximizing tax deductions is essential for healthy returns. Bonus depreciation is one of the most powerful tools available, allowing you to accelerate deductions on business assets. But what happens when the lines blur between personal and business use?

A common scenario we see is an investor turning a former primary residence into a rental property. While this is a great way to build a portfolio, it comes with a critical and often-overlooked tax rule that could impact your deductions. As Brian Kiczula of the American Society of Cost Segregation Professionals (ASCSP) highlighted, there's a specific regulation you must know.

The core of the issue lies in when you originally acquired the property for personal use. The regulation is straightforward and absolute:

Used property acquired by a taxpayer before September 28, 2017, for personal use does not qualify for bonus depreciation upon later conversion to business use.

This rule is designed to prevent assets acquired long ago from suddenly becoming eligible for the powerful benefits introduced by the Tax Cuts and Jobs Act (TCJA). The key is the original acquisition date, not the date you converted it to a rental.

Putting the Rule into Practice: A Real-World Scenario 🏡

Let’s use the exact example Brian explained to make this crystal clear:

1. Acquisition for Personal Use: You buy a house in 2015 to live in as your primary residence.
2. Change of Use: In 2019, you move out and decide to convert the house into a rental property, officially placing it into business service.

The Result: Under this rule, you cannot claim bonus depreciation on any of the assets from that property (such as 5-year appliances or 15-year land improvements identified in a cost segregation study).

Why? Because the property was first acquired by you for personal use in 2015, which is before the critical cutoff date of September 28, 2017. It doesn't matter that the conversion to business use happened after the new tax laws were in place.

The Takeaway for Investors 💡

Understanding the nuances of tax law is non-negotiable for serious investors. This rule is a perfect example of how an asset's history can directly affect its future tax treatment. Misinterpreting it could lead to an improper claim of bonus depreciation, putting you at risk during an IRS audit.

Before you assume an asset qualifies, always trace it back to its original acquisition date and its initial use. When in doubt, consulting with a qualified professional is the safest and most valuable course of action.

Learn More and Stay Informed

This rule is just one of many important considerations in real estate tax strategy. To dive deeper into topics like this and discover other ways to optimize your portfolio, visit the CostSegRx Blog.

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