Startup Expenses and Tax Breaks

Particular expenses incurred as you prepare a rental property (prior to actually letting the rental property,) are tax deductible. Let’s have a look at some of these expenses.

NOTE: The expenses we will look at here in this write-up aren’t the same types of expenses that qualify as a deduction within Internal Revenue Code section 195. Within this section 195, certain expenses incurred as startup expenditures in an active business or active trade 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 considered a passive activity not as an active business or trade. Find further information on passive versus active rules in the Tax Deductible Rental Losses article.

Note: It is not just when you have actually rented a property that rental activity “begins”, but when you’ve made the property available for rent or you have it out on the market.

Obtaining a Mortgage Expenses Incurred

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

Points

“Points” are charges paid by a borrower to take out a loan or a mortgage. These charges may also be called loan origination fees, maximum loan charges, or premium 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 with a tax professional.

Improvements vs. Repairs

You must depreciate and capitalize improvements you make to the property prior to putting it 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 maintains your property in good working condition without adding to its value or prolonging its use.

Bothell Tax CPA +John Huddleston is a graduate of Washington State University and the University of Washington. He has written many articles on accounting and other tax related subjects.