Startup Expenses and Deductions

A number of expenses incurred in readying a rental property (before actually letting the rental property) are tax deductible. Let’s have a look at some of these expenses.

Note: Startup expenses laid out here, differ from the expenses which qualify as deductible (in Internal Revenue Code section 195.) Under section 195, particular startup expenses (in an active trade or business) are deductible up to $5,000 with the balance amortizable over fifteen years. However, section 195 doesn’t apply to rental property because renting isn’t thought to be an active business or trade, but rather it is viewed as a passive activity. Find further information on this in the article entitled Tax Deductible Rental Losses.

Note: It is not when you’ve literally rented a property that rental activity “begins”, but when you’ve made the property available for rent.

Obtaining a Mortgage Expenses

Recording fees, mortgage fees, and abstract fees (amongst others) are capitalized and thus become part of your basis in the rental. Instead of expensing these fees all at once, you must depreciate those expenses. The article Depreciation Expenses for Rental Properties has more information relating to depreciation.

Points

What are points? They are charges paid by a borrower to take out a mortgage or a loan. This points or charges may also be called origination fees, or premium charges, or maximum loan charges. Points are deductible as interest, but require that you amortize the points over the life of the loan. Figuring out the amount of points to amortize per year is a complicated process beyond the scope of this article. Seek the advice of a tax professional.

Improvements vs. Repairs

You must depreciate and capitalize improvements to the property in advance of putting the rental property on the market. Improvements are those that prolong the use of the property or materially add to 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 rental property tax guide there is more on deductions and depreciation, you’d like to read further.

CPA +John Huddleston has written numerous articles over the years about accounting and other tax related issues. He is a graduate of the University of Washington School of Law, with a Masters in Tax Law and a Juris Doctorate.