8621 / Are there any situations where a taxpayer can now claim bonus depreciation with respect to used property in which the taxpayer previously held an interest? How do the bonus depreciation rules apply to leased property?

Under a complicated set of regulations introduced between 2018 and 2020, bonus depreciation may now be available for property that a taxpayer previously leased and later acquired. In some situations, a taxpayer may make improvements to property that is leased and obtain a depreciable interest in the property as a result. If the taxpayer later acquires the property, bonus depreciation is unavailable with respect to the portion of the property in which the taxpayer held a depreciable interest during the lease period.¹

Relatedly, if a taxpayer originally held a depreciable interest in property, and later acquires an additional depreciable interest in an additional portion of the same property, the additional depreciable interest is not treated as though it was used by the taxpayer prior to acquisition (i.e., it is eligible for bonus depreciation under the used property rules if all other requirements are satisfied). If the taxpayer previously had a depreciable interest in the subsequently acquired additional portion, bonus depreciation is not available.

A different rule applies in situations where a taxpayer sells a partial interest in property and later buys a partial interest in the same property. If a taxpayer holds a depreciable interest in a portion of the property, sells that portion or a part of that portion, and later acquires a depreciable interest in another portion of the same property, the taxpayer is treated as previously having a depreciable interest in the property up to the amount of the portion for which the taxpayer held a depreciable interest in the property before the sale.²

Short Holding Period Exception

The 2020 final regulations provide a safe harbor exception to the depreciable interest rule—so that the taxpayer is not considered to have had a depreciable interest in the property-in situations where the taxpayer disposes of the property within a short period of time after placing the property in service. If the following are true:

(a)  a taxpayer acquires and places in service property,

(b)  the taxpayer or a predecessor did not previously have a depreciable interest in the property,

(c)  the taxpayer disposes of the property to an unrelated party within 90 calendar days after the date the property was originally placed in service by the taxpayer (without taking into account the applicable convention), and

(d)  the taxpayer reacquires and again places in service the property,

the taxpayer’s depreciable interest in the property during that 90-day period is not taken into account for determining whether the property was used by the taxpayer or a predecessor at any time prior to its reacquisition by the taxpayer.³ The rule does not apply if the taxpayer reacquires and again places in service the property during the same taxable year the taxpayer disposed of the property.