Startup Expenses and Tax Breaks

A number of expenses incurred as you prepare a rental property (in advance of ultimately renting) are deductible. So let’s take a look at several of these expenses.

Note: Startup expenses discussed here, differ from the expenses which qualify as deductible (under section 195 of the Internal Revenue Code.) Under section 195, certain startup expenses (in an active business or trade) are deductible up to $5,000 with a balance amortizable over fifteen years. Though, under the section 195 code, rental activity isn’t included since rental property is regarded a passive activity instead of an active trade or business. Find more information on passive versus active rules in the article titled Tax Deductible Rental Losses.

Note: It isn’t when you have literally rented a property that rental activity “begins”, but when you have made the property available for rent.

Expenses to Obtain Mortgage

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

Points

What are points? They are charges paid by a borrower to take out a mortgage or a loan. 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. Schedule a sit-down with an accountant.

Improvements versus Repairs

You must capitalize and depreciate all improvements you make to the property in advance of putting the rental property on the market. Improvements are those that 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 aims to keep your property in good working condition, not to increase the market value or prolong use.

Redmond Tax CPA has written extensively on accounting and other tax related subjects. He is a graduate of Washington State University and the University of Washington.

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

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