Startup Expenses and Relevant Deductions

Certain expenses incurred while preparing a property for rental (previous to ultimately letting the rental property), are tax deductible. So let’s look at a couple of these expenses.

NOTE: These startup expenses we will look at within this piece of writing will not be the same sort of expenses that qualify as a deduction under Internal Revenue Code section 195. Within this section 195, particular expenses incurred as startup expenditures of an active trade or business are deductible up front 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 deemed a passive activity not an active business or trade. Find more information on this in the article entitled Tax Deductible Rental Losses.

Note: It is not when you have literally rented real estate that rental activity “begins”, but when you make the property available for rent.

The Expenses in Obtaining a Mortgage

Expenses such as mortgage commissions, abstract fees, and recording fees, are capitalized and develop into part of your basis in the property. This means you have to depreciate these expenses, rather than expensing them all at once. See the article entitled Depreciation Expenses for Rental Property, included in this Landlord Tax Guide, for further study of 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. Figuring out the quantity of points to amortize per year is a complicated process beyond the scope of this article. Talk to a tax professional.

Repairs vs. Improvements

You need to capitalize and depreciate improvements to the property previous to putting the rental property on the market. Improvements 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 aims to keep your property in good working condition, not to increase the market value or prolong use.

Tax Accountant +John Huddleston has written several dozen articles on accounting and other tax related subjects. He is a graduate of the University of Washington School of Law, with a Juris Doctorate and a Masters in Tax Law.