The Deductions in Startup Expenses

This post examines deductible rental startup expenses. You are able to deduct certain expenses incurred as you prepare your rental property, that is prior to actually letting it.

Note: The expenses reviewed within this post are not the same types of expenses that qualify as a tax write-off under Internal Revenue Code section 195. Under this section, particular expenses incurred as startup expenditures of an active business or trade are deductible up front up to $5,000, with a balance amortizable over a fifteen-year period. However, in this section of the Internal Revenue Code, rental activity isn’t included because rental activity is considered a passive activity not as an active trade or business. Find more information on passive versus active rules in the article entitled Tax Deductible Rental Losses.

Note: It isn’t just when you have actually rented a property that rental activity commences, but when you have made 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. This means that you must depreciate such expenses, instead of expensing them all at once. See the article entitled Depreciation Expenses for Rental Property, included in this Landlord Tax Guide, for a more in depth discussion on 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. Schedule a sit-down with a CPA.

Repairs vs. Improvements

You need to depreciate and capitalize all improvements you make to the property prior to putting the rental property on the market. Improvements prolong the use of the property or materially increase the market value of the property. 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.

Burien Accountant  has written extensively on accounting and other tax related matters. He is a graduate  of Washington State University and the University of Washington.

Burien CPAAbout Burien CPA
Burien CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

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