Tax Deductions in Startup Expenses

This individual article of the the Tax Guide for Landlords (“Guide”) looks at deductible startup expenses for rental properties. You might be able to deduct certain expenses incurred while preparing the rental property, that is before actually renting it.

NOTE: The expenses discussed within this write-up will not be the same sort of expenses allowed as a deduction according to Internal Revenue Code section 195. Under this section 195, certain expenses incurred as startup expenditures in an active business or active trade are deductible up to $5,000, with a balance amortizable over a fifteen-year period. Though, under section 195 code, rental activity isn’t included since rental property is regarded a passive activity instead of an active trade or business. See the article titled Tax Deductible Rental Losses, included in this Guide, for more on passive activity rules.

NOTE: “Rental activity” begins as soon as you place a property on the market and make it available for rent, not when you have actually rented it.

Obtaining a Mortgage Expenses

Expenses such as recording fees, mortgage commissions, and abstract fees, are capitalized and turned out to be part of your basis in the property. And this means that you have to depreciate these particular expenses, rather than expensing them all at once. Read the Depreciation Expenses for Rental Property article, included in this Guide, for further study of depreciation.

Points

“Points” are charges paid by a borrower to take out a loan or a mortgage. 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 how many points to amortize per year is a complicated process beyond the scope of this article. Talk to a tax professional.

Improvements vs. Repairs

You must capitalize and depreciate all improvements you make to the property before putting the property on the market. Improvements prolong the use of the property or materially increase the market value of the property. 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 Landlord’s Tax Guide there is more on deductions and depreciation, you’d like to read further.

Seattle Accountant +John Huddleston has written extensively on accounting and other tax related subjects. He is a graduate of Washington State University and the University of Washington.