Applicable Deductions within Startup Expenses

This particular post of the the rental property Tax Guide concentrates on deductible startup expenses for rental properties. You might be permitted to deduct select expenses incurred while preparing the rental property, but prior to actually renting the rental property.

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

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

Obtaining a Mortgage Expenses Incurred

Expenses such as recording fees, mortgage commissions, and abstract fees, are capitalized and come to be part of your basis in the property. And this means you have to depreciate these particular expenses, rather than expensing them all at once. Read the article entitled Depreciation Expenses for Rental Property, included in this Guide, for further study of 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 how many points to amortize per year is a complicated process beyond the scope of this article. Talk to a tax professional.

Repairs versus Improvements

You must depreciate and capitalize all improvements you make to the property prior to putting the 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 prolifically on accounting and other tax related subjects. He is a graduate of Washington State University and the University of Washington School of Law.