Applicable Deductions within Startup Expenses

This particular section discusses deductible startup expenses for rental properties. You may be allowed to deduct certain expenses you incur while preparing a property for rental, but prior to renting the rental property.

Note: Startup expenses discussed within this segment of the Landlord’s Tax Guide, differ from the expenses which qualify as deductible (in section 195 of the Internal Revenue Code.) Under section 195, certain startup expenses (in an active trade or business) are deductible up to $5,000 with a balance amortizable over a fifteen-year time frame. Though, under the section 195 code, rental activity isn’t included on the grounds that rental property is perceived as a passive activity instead of an active business or an active trade. See the article Tax Deductible Rental Losses, included in this Guide, for closer look at passive activity rules.

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

The Expenses in Obtaining a Mortgage

Expenses such as mortgage commissions, abstract fees, and recording fees, are capitalized and become part of your basis in the property. This means you will need to depreciate such expenses, rather than expensing them all at once. See the Depreciation Expenses for Rental Property article, included in this Landlord Tax 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. 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 no simple chore. Visit a tax professional.

Repairs versus Improvements

You need to depreciate and capitalize all improvements to the property previous 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 aims to keep your property in good working condition, not to increase the market value or prolong use. See the series of articles about deductions and depreciation, included in this Guide, for more information.

Certified public accountant +John Huddleston has written extensively on accounting and other tax related issues. He is a graduate of Washington State University and the University of Washington.