Paid the contractor in December, work finishes in January: which year gets the deduction?

The short answer is January — the following tax year. Depreciation on a rental improvement starts when the item is placed in service, meaning installed and ready for its intended use. The date you wrote the check does not control it. If you pay a contractor $20,000 on December 20 and the crew finishes on January 14, the deduction belongs on next year’s return, not this year’s. Paying early buys you a happy contractor and nothing else on the tax side.

This is the most expensive misunderstanding of the fourth quarter. Owners race to pay invoices before December 31, then find out in March that the deduction landed a year later than planned.

Does paying a contractor in December give me the deduction this year?

Not for work you have to capitalize. An improvement to a rental — new appliances, new carpet, a fence, a driveway, a roof, a furnace — is a capital expenditure, and capital expenditures are recovered through depreciation over time rather than deducted when paid. Depreciation cannot begin before the property exists in a usable state at your rental. A refrigerator still on the delivery truck on December 31 has not been placed in service, no matter when it was paid for or when the purchase order was signed.

Prepaying does not change that, and it generally does not help with ordinary expenses either. Paying in advance for services that have not yet been performed does not usually move the deduction into the year of payment, even on the cash method.

What does “placed in service” mean for a rental improvement?

It means ready and available for its specific use at the property. Appliances hooked up and working. Carpet installed. The fence standing. The driveway poured and cured enough to drive on. Delivered but uninstalled does not count. The same test governs the building itself when you buy a rental, which we walked through in what the placed-in-service date really means on a rental.

Two dates get confused here, and it is worth separating them. The acquisition date — when you signed the contract to buy the item or the work — is what determines whether 100% bonus depreciation is available at all, because under the OBBBA rules the 100% rate applies to property acquired after January 19, 2025. Anything you contract for this fall clears that test easily. But the placed-in-service date is what determines which tax year the deduction lands in. You need both: acquired after January 19, 2025 for the rate, and in service by December 31 for the year.

What if part of the job finished in December and the rest in January?

Then you split it, item by item. Each asset has its own placed-in-service date, and there is no rule that forces a single project onto one side of the calendar. The appliances that were installed in December are 2026 property. The fence the crew could not build because the ground froze is 2027 property. This is exactly why mixed-scope renovation invoices cause trouble: a single line reading “renovation — $31,000” gives your CPA no way to assign dates or recovery periods. Ask the contractor to invoice by scope, with completion dates, and keep the dated photos.

A $31,000 December job, split across two tax years

Take a single-family rental. In November the owner contracts $31,000 of work and pays the full amount on December 20, 2026. The scope: a $9,000 appliance package, $5,000 of new carpet, a $7,000 privacy fence, a $4,000 driveway replacement, and $6,000 for a new water heater and electrical panel. The appliances and carpet go in on December 18. The fence and driveway slip to January 14 because the ground is frozen.

The appliances and carpet are 5-year property, acquired well after January 19, 2025, and in service in 2026. That is $14,000 of 100% bonus depreciation on the 2026 return. The water heater and panel are structural components of a residential rental, so they go on a 27.5-year schedule; with the mid-month convention and a December in-service date, the $6,000 produces about $9 of depreciation this year. Total 2026 deductions: roughly $14,009. At a 32% federal marginal rate, about $4,483 of federal tax saved on the 2026 return.

The fence and driveway are $11,000 of 15-year land improvements, and they were paid for in December — but they were not in service until January. That $11,000 deduction, worth roughly $3,520 at the same rate, moves to the 2027 return. Nothing was lost; 100% bonus has no scheduled sunset. But a full year of the owner’s money sat with the IRS because the deduction tracked the shovel, not the check. Had the fence and driveway gone in during a mild first week of December instead, all $25,000 of short-life property would have landed in 2026 — about $8,000 of federal tax saved this year rather than next.

What should I do before December 31?

Three things. First, find out from each contractor what can realistically be finished, not started, by December 31, and sequence the short-life items first — appliances, flooring, furnishings — because those are the dollars that come off in full. Second, get invoices broken out by scope with completion dates on them, not one lump sum. Third, if the work is on a property you bought in the last few years and you never had the building broken into its components, the improvement question is only half the opportunity: the original purchase price is usually carrying far more short-life property than the closing statement shows. Our walkthrough of which rental improvements qualify for 100% bonus depreciation covers which items are worth rushing.

Dated invoices, dated photos, and a record of when the unit went back on the market are what make a December in-service date audit-ready rather than arguable. If you are weighing a year-end purchase or a larger renovation, the free instant estimate will show what a study is likely to move into year one.