Startup Expenses and Tax Breaks

Particular expenses incurred in readying a rental property (previous to actually letting the rental property) are deductible. Let’s take a look at a few of them.

Note: Startup expenses laid out here, differ from the expenses which are deductible (in section 195 of the Internal Revenue Code.) Under section 195, a number of startup expenses (in an active business or trade) are deductible up front up to $5,000 with this balance amortizable over fifteen years. However, section 195 does not apply to rental property this is because renting isn’t considered an active trade or business, but rather it is perceived as a passive activity. See the article Tax Deductible Rental Losses, included in this Guide, for more on passive activity rules.

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

Obtaining a Mortgage Expenses Incurred

Expenses such as recording fees, mortgage commissions, and abstract fees, are capitalized and become part of your basis in the property. And this means you have to depreciate these expenses, instead of expensing them all at once. See the Depreciation Expenses for Rental Property article, included in this rental property tax 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 essentially prepaid interest. Thus, they are deductible as interest, but you cannot deduct the full amount at once. Rather, you must 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. Talk with a Certified public accountant.

Improvements versus Repairs

You need to depreciate and capitalize improvements to the property in advance of putting the property on the market. Improvements prolong the use of the property or materially increase the market value of the property. 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.

Tax Accountant +John Huddleston