Depreciation - Asset not paid for in full

[Gretel]

If a rental unit that was built is placed in service (available for rent) in December 2008 but some of the bills are paid in January, is the depreciable basis for 2008 the total building costs or only the costs that have been paid already?

I think it is the full amount but cannot find anything in writing.

[erchess]

What Basis Taxpayer?

Why would it not come down to whether the owner or the entity is a cash basis or accrual basis taxpayer? If cash, then I would think depreciate based on what has been paid by cash check or credit, and if accrual I would think depreciate on what has accrued, i.e. the full amount.

[Gretel]

It is a cash basis taxpayer. I am not convinced that a cash basis taxpayer has to actually have paid for the asset before depreciating. The wording is: Placed in service. Unlike with inventory, where it says "the later of sold or paid for", I cannot find the wording in regard to depreciation.

I mean, with depreciating a building you anyway get only a small portion of what you paid for in the year placed in service. Any other suggestions?

[Jesse]

I don't have an answer - my first thought is what was actually paid in December would be the amount to use as basis for depreciation in 2008? What is paid in 2009 would be added to basis for depreciation in 2009?

How much money are you looking at? Is there any income for December? Even at a round $100,000 for residential rental property you're looking at approx $150 for December's depreciation, commercial property would be even less.

I know you want to do what is correct, but I guess either way you are probably talking such a small amount of depreciation that I wouldn't worry.

[taxxcpa]

Depreciation

Maybe I don't understand the comments but I could interpret it to mean that if you buy a building and have a mortgage, you could not depreciated the full cost, only the portion that has been paid in cash if you are on the cash basis? So if you had only paid $ 10,000 on a $ 100,000 building, you would only depreciate $10000, then next year maybe you would be able to depreciate $ 15,000.

Obviously that is not how it works. You depreciate the cost, including debt, based on when you have acquired title and place it in service.

[Jesse]

Maybe I don't understand the comments but I could interpret it to mean that if you buy a building and have a mortgage, you could not depreciated the full cost, only the portion that has been paid in cash if you are on the cash basis? So if you had only paid $ 10,000 on a $ 100,000 building, you would only depreciate $10000, then next year maybe you would be able to depreciate $ 15,000.

Obviously that is not how it works. You depreciate the cost, including debt, based on when you have acquired title and place it in service.

If your interpretation is correct I am 100% in agreement with you.

I took it as some bills were not paid by taxpayer or mortgage company - simply not paid. Maybe a furnace was installed in December and place is ready to rent, but I did not receive and pay the contractor's bill until 2009? Do I add this to basis in 2008 or 2009?

Either way It would be such an immaterial amount.

[Gretel]

It is a rental complex, which was built by the rental LLC, all together 46 units, 10-plex, 12-plex and so on, ready for use at different dates in 2008. A little bit of rental income in 2009 and millions of dollars involved in building. So I am not talking about debt, I am talking about paying the final bills for the asset.

Yes, I want to do what is right. I also don't want to add another little bit of basis in 2009 to each of the plexes since they were all place in service in 2008. The only invoice I will add in 2009 is for landscaping, but that is placed in service in 2009 anyway.

[JG EA]

It is a rental complex, which was built by the rental LLC, all together 46 units, 10-plex, 12-plex and so on, ready for use at different dates in 2008. A little bit of rental income in 2009 and millions of dollars involved in building. So I am not talking about debt, I am talking about paying the final bills for the asset.

Yes, I want to do what is right. I also don't want to add another little bit of basis in 2009 to each of the plexes since they were all place in service in 2008. The only invoice I will add in 2009 is for landscaping, but that is placed in service in 2009 anyway.

Paying the final bills? If you mean the building was all built and put into service in 2008 then the price would be the depreciation starting point. It would be no different than buying a piece of machinery and depreciating that even though you will be paying for it for years.

If you mean that some of it was not put into service and things were being added and paid for later on then you would have to have extra lines of depreciation in 2009. Just like improvements require an additional line.

Also, in service in 2008 means advertised for rent, ready to move in. You said that a little rent in 2009? I think that if each unit was ready at different times in 2008, but just did not have any renters then you would have several lines of deprecation in 2008 anyway..

[Gretel]

Paying the final bills? If you mean the building was all built and put into service in 2008 then the price would be the depreciation starting point. It would be no different than buying a piece of machinery and depreciating that even though you will be paying for it for years.

Thanks, JG. I had just given up on getting any more opinions. This is what I mean. BUT after the last work was done in 2008, let's say 12/20., the invoice was received on 12/30. and paid in 2009. This is different than not paying in full for a piece of machinery.

You still think "the price" of the project can be used for depreciation in 2008?

[JG EA]

Well, maybe I'm all wet. (In one of those can't think clearly modes) but I don't think it has to do with cash accounting and not being able to count an item because of paying in 2009. The building was complete in 2008, but not all paid for. How is that any different than another asset?

But if it is really bothering you can you identify the reason? Is it because it is for something that might seem in the nature of a improvement (rather than part of the price of the making of the building) after it was done and in service? If so, just make another line in 2009.

[Gretel]

Thanks again. The only reason it is bothering me is that if feels strange to depreciate what has not been paid for (other than loan). Since these are newly constructed buildings all funds were used for this initial construction.

I am going to take the full basis in 2008, when it was placed in service.

[David1980]

Thanks again. The only reason it is bothering me is that if feels strange to depreciate what has not been paid for (other than loan). Since these are newly constructed buildings all funds were used for this initial construction.

I am going to take the full basis in 2008, when it was placed in service.

I would treat it as if they "financed" that second payment made in 2009. After all, if they had instead taken a 30 year loan on the the building you would start depreciating right away even though they are not out of pocket the full purchase price up front.

[David1980]

Like wise, a lot of the mechanics I work with will get their tools from snapon/matco "on account" and I will depreciate or 179 those tools right away, even though they may be paying the snapon guy for years. One guy starting out bought $20k of tools (obviously he will be paying on that for a while...)

[Gretel]

Thanks, David. I am afraid I am beating this to death.

Somehow I cannot overcome the clear distinction between buying an asset on credit and not paying the bill or not getting the bill. I had a situation with another project where the contractor forgot to send the bill and it came three months later. Luckily this was not at years end.

Would you still say "treat it as if it was financed" if the bill has not been received yet?

If it was an expense you clearly can deduct what is financed but you cannot deduct what you haven't paid for if on cash basis.

[Gretel]

I made up my mind. Since it says nowhere that you need to have paid all the bills, rather words are used like: "paid or incurred", or, in case of leases "incident of ownership", I am certain that important thing is have the asset "placed in service".