The Deductions in Rental Startup Expenses

Posted by on January 17, 2013 · Leave a Comment 

Some expenses incurred in preparing a property for rental (before actually renting) are tax deductible. So let’s look at a few of them.NOTE:These expenses outlined within this post aren’t the same variety of expenses allowable as a deduction under Internal Revenue Code section 195. Under the section 195, certain startup expenses (in an active trade or business) are deductible up to $5,000 with a balance amortizable over fifteen years. However, section 195 is inapplicable to rental property because renting isn’t regarded an active trade or business, but rather it is considered a passive activity. Find a great deal more information on active versus passive rules in the Tax Deductible Rental Losses article.Note: It is not just once you have actually rented real estate that rental activity commences, but when you have made the property available for rent.

The Expenses of Obtaining a Mortgage

Recording fees, mortgage fees, and abstract fees (amongst others) are capitalized and so become part of your basis in the property. Instead of expensing these fees all at once, you have to depreciate these expenses. The article Depreciation Expenses for Rental Properties has further information relating to 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 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. Schedule a date with a Seattle tax pro.

Improvements vs. Repairs

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. 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.

Seattle Accountant has written extensively on accounting and other tax related issues of concern to small business owners. He is a graduate of Washington State University and the University of Washington.

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Renton CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

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