Deduction of Startup Expenses

Several expenses incurred in readying a rental property (previous to actually letting the rental property) are tax deductible. So let’s have a look at a few of them.

Note: Startup expenses discussed within this segment of the rental property tax guide, are dissimilar from the expenses which qualify as deductible (in section 195 of the Internal Revenue Code.) Under the section 195, certain startup expenses (in an active business or trade) are deductible up front up to $5,000 with this balance amortizable over a fifteen-year time frame. Though, under section 195 code, rental activity isn’t included because rental property is regarded a passive activity instead of an active trade or business. Find further information on active versus passive rules in the Tax Deductible Rental Losses article.

NOTE: “Rental activity” begins when you make the property available for rent and place it on the market, not when you have actually rented it.

Expenses to Obtain Mortgage

Abstract fees, recording fees, and mortgage fees (amongst other fees) are capitalized and thus become part of your basis in the rental property. Instead of expensing these fees all at once, you have to depreciate these expenses.

Points

What are points? They are charges paid by a borrower to take out a mortgage or a loan. These charges may also be called loan origination fees, maximum loan charges, or premium charges. Points are deductible as interest, but require that you amortize the points over the life of the loan. Determining the amount of points to amortize per year, is task beyond the scope of this article. Talk with a CPA.

Improvements versus Repairs

You need to capitalize and depreciate improvements to the property in advance of putting the rental property on the market. Improvements prolong the use of the property or materially increase the property’s market value. Repair expenses, on the other hand, you may freely deduct. A repair maintains your property in good working condition without adding to its value or prolonging its use. Within the Landlord’s Tax Guide there is more on deductions and depreciation, you’d like to read further.

Tax Accountant +John Huddleston has written numerous articles on accounting and other tax related subjects. He is a graduate of Washington State University and the University of Washington.