Startup Expenses and Tax Deductions

Particular expenses incurred in readying a property for rental (previous to ultimately renting) are deductible. Let’s look at several of these expenses.

Note: Startup expenses laid out here, are dissimilar to the expenses allowable as a deduction (in Internal Revenue Code section 195.) Within this section, certain expenses incurred as startup expenditures in an active trade or business are deductible up to $5,000, with a balance amortizable over a fifteen-year period. However, in this section 195 of the Internal Revenue Code, rental activity is not included because rental activity is thought to be a passive activity not as an active trade or business. See the article Tax Deductible Rental Losses, included in this Guide, for more on passive activity rules.

NOTE: Rental activity starts when you place a property on the market, not when you have actually have a tenant or a renter.

Obtaining a Mortgage Expenses

Recording fees, mortgage fees, and abstract fees (amongst others) are capitalized and so become part of your basis in the rental property. Rather than expensing these fees all at once, you must depreciate the expenses.

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. Determining the amount of points to amortize per year, is task beyond the scope of this article. Seek the counsel of a tax professional.

Repairs versus Improvements

You must capitalize and depreciate all improvements you make to the property in advance of 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. 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.

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