Deduction of Startup Expenses

Several expenses incurred as you prepare a property for rental (in advance of actually renting) are tax deductible. So let’s take a look at a few of them.

NOTE: These startup expenses presented within this piece of writing are not the same sort of expenses that qualify as a deduction according to Internal Revenue Code section 195. Under section 195, specific startup expenses (in an active trade or business) are deductible up to $5,000 with a balance amortizable over fifteen years. However, in this section 195 of the Internal Revenue Code, rental activity is not included because rental activity is considered a passive activity not as an active trade or business. Find more information on active versus passive rules in the article entitled Tax Deductible Rental Losses.

Note: It isn’t just when you have actually rented a property that rental activity starts, but when you’ve made the property available for rent.

Expenses Relating to Obtaining a Mortgage

Expenses such as recording fees, mortgage commissions, and abstract fees, are capitalized and come to be part of your basis in the property. This means you have to depreciate such expenses, instead of expensing them all at once. See 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. 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. Figuring out the quantity of points to amortize per year is a complicated process beyond the scope of this article. Consult a tax professional.

Improvements versus Repairs

You need to capitalize and depreciate improvements to the property in advance of putting it 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 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.

Certified public accountant +John Huddleston has written prolifically on accounting and other tax related matters facing small business owners. He is a graduate of Washington State University and the University of Washington School of Law.