Deduction of Startup Expenses

This section examines deductible startup expenses for rental properties. You are able to deduct certain expenses you incur while preparing your property for rental, but before renting the rental property.

NOTE: These startup expenses we will look at here in this post are not the same type of expenses allowed as a deduction under section 195 of Internal Revenue Code. Within this section 195, particular expenses incurred as startup expenditures of an active trade or business are deductible up front up to $5,000, with a balance amortizable over a fifteen-year period. However, in this section 195 of the Internal Revenue Code, rental activity is not included because rental activity is thought to be a passive activity not as an active trade or business. See the article Tax Deductible Rental Losses, included in this Guide, for a more focused study of passive activity rules.

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

The Expenses of Obtaining a Mortgage

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

Points

“Points” are charges paid by a borrower to take out a loan or a mortgage. 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

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You must depreciate and capitalize all improvements to the property prior to putting the property on the market. Improvements 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 aims to keep your property in good working condition, not to increase the market value or prolong use. Within the Landlord’s Tax Guide there is more on deductions and depreciation, you would like to read further.

Tax CPA +John Huddleston has written many articles on accounting and other tax related issues that pertain to small businesses. He is a graduate of the University of Washington School of Law.