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

“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 +John Huddleston has written prolifically on accounting and other tax related subjects. He is a graduate of the University of Washington School of Law.