Startup Expenses and Deductions

Several expenses incurred in preparing a rental property (previous to ultimately letting the rental property) are deductible. So let’s take a look at several.

Note: Startup expenses discussed within this segment of the Landlord’s Tax Guide, are dissimilar from the expenses which qualify as deductible (under 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 is not included given that rental property is perceived as a passive activity instead of an active business or an active trade. Find a great deal more information on passivity in the Tax Deductible Rental Losses article.

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

Obtaining a Mortgage Expenses

Abstract fees, recording fees, and mortgage fees (amongst other fees) are capitalized and so become part of your basis in the property. Instead of expensing these fees all at once, you must depreciate those expenses.

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 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 an appointment with a CPA.

Repairs versus Improvements

You must depreciate and capitalize improvements to the property before putting the property on the market. Improvements are those that prolong the use of the property or materially add to the property’s market value. 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 would like to read further.

Tax Accountant +John Huddleston has written prolifically on accounting and tax related issues facing small businesses. He is a grdaute of Washington State University and the University of Washington.