Startup Expenses and Deductions

Particular expenses incurred as you prepare a rental property (prior to ultimately letting the rental property,) are tax deductible. So let’s take a look at a couple of them.

NOTE: These startup expenses reviewed in this write-up will not be the same variety of expenses that are allowable as a deduction according to Internal Revenue Code section 195. Under the section 195, specific startup expenses (in an active trade or business) are deductible up to $5,000 with a balance amortizable over fifteen years. But, section 195 does not apply to rental property this is because renting is not regarded an active business or trade, but rather it is regarded a passive activity. See the article Tax Deductible Rental Losses, included in this Guide, for more on passive activity rules.

Note: It isn’t just when you have literally rented a property that rental activity “begins”, but when you’ve made the property available for rent.

Expenses to Obtain Mortgage

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

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. Make an appointment with a certified public accountant.

Improvements versus Repairs

You must capitalize and depreciate improvements to the property previous to putting it on the market. Improvements 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 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.

Bellevue Tax Accountant +John Huddleston is a graduate of the University of Washington School of Law, with a Juris Doctorate and a Masters in tax Law.