Rental Property In Service Defined

By Jason Watson, CPA
Posted Sunday, May 25, 2025

Throughout this book, we use the term “in-service” and then parenthetically use the words “ready and available for occupancy, and held out for rental use through advertising and related efforts.” Having your rental property be considered in-service is huge for depreciation, operating expense deductions and material participation. Let’s break this down-

Ready and Available For Its Intended Use

Treasury Regulations 1.167(a)-11(e)(1)(i) reads in part-

(e) Accounting for eligible property
(1) Definition of first placed in service
(i) In general. The term “first placed in service” refers to the time the property is first placed in service by the taxpayer, not to the first time the property is placed in service. Property is first placed in service when first placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity.

The term ready or readiness is not specifically defined by tax code or IRS publications, but it generally means the following-

• The rental property is in a condition that is suitable, functional and safe for occupancy. It is complete from a repairs or construction perspective, and has the operational capacity to generate income. Basic utilities such as electricity, water, sewer or septic, and heat are also required. Certain cabins and other outliers might not have electricity or heat beyond a fireplace, but you get the idea of suitable, functional and safe.
• The property is compliant with local ordinances. This one gets super annoying at times- you have a rental property, and you want to rent it as a short-term rental. However, you need a permit or zoning approval from the local authorities which is delayed several months. The rental property is otherwise ready, but unfortunately it is not ready for its intended use which is as a short-term rental.

The term available simply means that it is currently vacant, or will be vacant in the future. Additionally, there aren’t any unreasonable restrictions such as only people with green eyes can occupy the rental property. Its intended use is not necessarily to have a guest or tenant; that is the means. The ends, the intended use, is to produce income.

Being Held Out For Rental Use

This is also not defined very well, but over the years with several tax court cases and other accounting industry writings it has come to mean that a bona fide effort is made to genuinely offer the property for rent. This includes advertising and showing the property, and engaging with a rental property manager if applicable.

Next, and this is where taxpayers routinely get in trouble, your efforts must be documented. If you are tracking your time for material participation or real estate professional status (REPS), then this becomes more straightforward, but you are not out of the woods yet. The IRS and tax courts want more than just a time log that reads “advertised rental property.” They want to see how you advertised it, where, and the associated expenses. Do you have a mileage log showing you meeting a prospective tenant? Do you have names of those who inquired? Can you show emails and text messages to support your bona fide effort claim?

Finally, when considering the “being held out for rental use” standard, the tax courts often use the phrase the “property was held for the production of income.” Meredith v. Commissioner, 65 Tax Court 34 (1975) and Grant v. Commissioner, 84 Tax Court 809 (1985) are two common cases that use this phrase. In essence, and as scattered through this book, you must demonstrate that you are treating your rental property like a business- trying to find customers to generate income, among other business-like things.

Why do you care?

• Deduction of depreciation and operating expenses. See common rental property tax deductions section on page 205 for more information.
• Material participation time only counts when rental property is considered in-service. See what time counts for material participation section on page 125 to groan about this rule.

As a reminder, the in-service date is not your first rented day.

Taking The Rental Offline For Repairs or Renovations

Once a property is placed in service, it remains in service even if you take it offline for repairs or renovations provided that you intend to rent it again and consider the property held for producing income. Said differently, once placed in service, it remains in service unless it is no longer held for producing income (your intent, and defending what’s on your mind, becomes a big deal).

See idle property versus vacant rental property section for a ton more information on this nuance.