Deduction of Startup Expenses

Particular expenses incurred in preparing a property for rental (prior to actually renting,) are deductible. So let’s have a look at several of them.

Note: Startup expenses discussed here, are dissimilar from the expenses which qualify as deductible (under section 195 of the Internal Revenue Code.) Under section 195, a number of startup expenses (in an active trade or business) are deductible up to $5,000 with the balance amortizable over fifteen years. However, in this section of the Internal Revenue Code, rental activity is not included because rental activity is thought to be a passive activity not an active trade or business. See the article titled Tax Deductible Rental Losses, included in this Guide, for a more focused study of passive activity rules.

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

Expenses Related to Obtaining a Mortgage

Expenses such as mortgage commissions, abstract fees, and recording fees, are capitalized and become part of your basis in the property. And this means you will need to depreciate these particular expenses, rather than expensing them all at once. See the Depreciation Expenses for Rental Property article, included in this Guide, for more on depreciation.


“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 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 Bellevue tax professional.

Repairs vs. Improvements

You must capitalize and depreciate all improvements you make to the property before putting the rental property on the market. Improvements 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 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.

Bellevue Accountant has written prolifically on accounting and other tax related subjects. He is a graduate of the University of Washington School of Law.

Seattle CPAsAbout Seattle CPAs
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has been the owner of his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!

  • Huddleston Tax CPAs / Huddleston Tax CPAs – Bellevue CPAs
    Certified Public Accountants Focused on Small Business
    40 Lake Bellevue Suite 100 / Bellevue, WA 98005
    (425) 273-6512

    Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching,
    QuickBooks consulting, bookkeeping, payroll, offer in compromise debt relief, and business valuation services for small business.

    We serve: Tukwila, SeaTac, Renton. We have a few meeting locations. Call to meet John C. Huddleston, J.D., LL.M., CPA, Lance Hulbert, CPA, Grace Lee-Choi, CPA, Jennifer Zhou, CPA, or Jessica Chisholm, CPA. Member WSCPA.