Startup Expenses and Deductions

Several expenses incurred while preparing a property for rental (before ultimately renting,) are deductible. Let’s have a look at a few.

Note: Startup expenses discussed here, are dissimilar to the expenses allowable as a deduction (in Internal Revenue Code section 195.) Under that section 195, certain expenses incurred as startup expenditures in an active business or trade are deductible up front up to $5,000, with a balance amortizable over a fifteen-year period. However, section 195 does not apply to rental property this is because renting isn’t deemed an active trade or business, but rather a passive activity. See the article titled Tax Deductible Rental Losses, included in this Guide, for a more focused study of 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.

The Expenses in Obtaining a Mortgage

Abstract fees, recording fees, and mortgage fees (amongst others) are capitalized and thus become part of your basis in the rental property. Instead of expensing these fees all at once, you need to depreciate those expenses.

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 Seattle CPA.

Repairs versus Improvements

You need to capitalize and depreciate improvements you make to the property before putting the rental property on the market. Improvements prolong the use of the property or materially increase 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. Within the Landlord’s Tax Guide there is more on deductions and depreciation, you would like to read further.

Seattle Accountant +John Huddleston has written extensively on accounting and other tax related subjects. He holds a Juris Doctorate and a Masters in Tax Law from the University of Washington’s School of Law.