Deduction of Startup Expenses

A number of expenses incurred as you prepare a rental property (in advance of actually renting) are deductible. Let’s take a look at a couple of them.

Note: Startup expenses discussed within this segment of the Landlord’s Tax Guide, are dissimilar to the expenses allowable as a deduction (in section 195 of the Internal Revenue Code.) According to this section, certain expenses incurred as startup expenditures in an active trade or business are deductible up to $5,000, with a balance amortizable over a fifteen-year period. However, section 195 doesn’t apply to rental property this is because renting is not regarded as an active business or trade, but rather a passive activity. Find a great deal more information on this in the Tax Deductible Rental Losses article.

Note: It isn’t when you have actually rented real estate that rental activity commences, but when you’ve made the property available for rent or you have it out on the market.

Expenses to Obtain Mortgage

Expenses such as mortgage commissions, abstract fees, and recording fees, are capitalized and develop into part of your basis in the property. And this means you must depreciate these particular expenses, instead of expensing them all at once. Read the Depreciation Expenses for Rental Property article, included in this Landlord Tax Guide, for more on 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 essentially prepaid interest. Thus, they are deductible as interest, but you cannot deduct the full amount at once. Rather, you must 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. Make an appointment with a certified public accountant.

Repairs vs. Improvements

You need to capitalize and depreciate improvements you make to the property before putting the rental property on the market. Improvements are those that prolong the use of the property or materially increase the property’s market value. On the other hand, you may freely deduct all repair expenses. A repair maintains your property in good working condition without adding to its value or prolonging its use. See the series of articles about deductions and depreciation, included in this Guide, for more information.

Tax Accountant +John Huddleston has written numerous articles on accounting and other tax issues typical to small businesses. He is a graduate of the University of Washington’s School of Law, holding a Masters in Tax Law and a Juris Doctorate.