If you're claiming depreciation on property that you built yourself, rather than purchased from someone else, you may need to determine whether the asset is considered a self-constructed asset under Section 263A.
This distinction matters because certain tax benefits, including special depreciation allowances, may apply differently depending on how and when the property was constructed. Understanding whether an asset is self-constructed can help ensure you're claiming depreciation correctly on your 2026 tax return, filed in 2027.
What Is a Self-Constructed Asset?
A self-constructed asset is property that a taxpayer manufactures, builds, constructs, or produces for their own use rather than purchasing it as a finished product.
Common examples include:
- A farmer who builds a grain storage facility
- A business that constructs its own warehouse
- A manufacturer that builds production equipment for internal use
- A landlord who constructs a rental building
- A recycling company that builds its own processing facility
In each case, the taxpayer is creating the asset rather than buying it "off the shelf."
What Is Section 263A?
Section 263A, often called the Uniform Capitalization (UNICAP) rules, requires businesses to capitalize certain direct and indirect costs associated with producing, constructing, or improving property.
Instead of deducting these costs immediately, they're added to the property's basis and recovered through depreciation, amortization, or when the property is sold.
Costs that may need to be capitalized include:
- Construction labor
- Building materials
- Engineering and design costs
- Equipment used during construction
- Indirect overhead expenses
- Certain interest expenses
As a result, the tax basis of a self-constructed asset often includes much more than just the cost of raw materials.
When Is an Asset Considered Self-Constructed?
An asset is generally considered self-constructed when the taxpayer:
- Physically builds the property,
- Produces the property,
- Manufactures the property, or
- Hires contractors to construct property on the taxpayer's behalf.
Even if an outside contractor performs the work, the asset may still be treated as self-constructed if the taxpayer bears the costs and owns the project during construction.
What Does "Placed in Service" Mean?
For depreciation purposes, an asset is placed in service when it is ready and available for its intended business use.
This doesn't necessarily mean the asset has already been used. It simply means it's capable of performing the function for which it was built.
Examples
A warehouse is placed in service when construction is complete and the building is ready to store inventory.
A manufacturing line is placed in service when installation and testing are complete and production can begin.
A rental building is generally placed in service when it is ready and available for tenants to occupy.
The placed-in-service date is important because depreciation generally begins during the tax year the asset is placed in service.
Why Does Section 263A Matter for Depreciation?
For self-constructed property, Section 263A affects the asset's depreciable basis.
For example, assume a taxpayer constructs a facility with:
- Materials: $500,000
- Labor: $300,000
- Engineering costs: $75,000
- Capitalized overhead: $25,000
The property's depreciable basis would generally be $900,000, not just the cost of materials.
That higher basis may increase the amount eligible for depreciation deductions, including any applicable special depreciation allowances.
How Do Self-Constructed Assets Affect Special Depreciation?
For certain depreciation provisions, self-constructed property may qualify for special treatment if construction begins and the property is placed in service during specific periods established by law.
In many cases, the taxpayer must determine:
- When construction began
- Whether the property qualifies as self-constructed
- Whether Section 263A applies
- The total capitalized cost basis
- The date the asset was placed in service
These factors can affect eligibility for accelerated depreciation and the amount of the deduction.
What Records Should You Keep?
If you construct your own business property, maintain records showing:
- Construction contracts
- Material invoices
- Payroll records
- Engineering and architectural fees
- Equipment costs
- Capitalized indirect expenses
- Construction start dates
- Placed-in-service dates
Good documentation helps establish the property's basis and supports any depreciation deductions claimed on your return.