This section examines deductible rental startup expenses. You might be able to deduct certain expenses you incur while preparing the rental property, that is before actually letting the rental property.
Note: Startup expenses laid out here, are dissimilar to the expenses allowable as a deduction (in section 195 of the Internal Revenue Code.) Within that section 195, certain expenses incurred as startup expenditures for an active business or trade are deductible up front up to $5,000, with a balance amortizable over a fifteen-year period. However, in this section 195 of the Internal Revenue Code, rental activity is not included because rental activity is deemed a passive activity not as an active trade or business. Find a great deal more information on passivity in the article titled Tax Deductible Rental Losses.
Note: It isn’t when you’ve actually rented a property that rental activity starts, but when you make the property available for rent.
Obtaining a Mortgage Expenses
Expenses such as mortgage commissions, abstract fees, and recording fees, are capitalized and come to be part of your basis in the property. This means you have to depreciate such expenses, instead of expensing them all at once. Read the article entitled Depreciation Expenses for Rental Property, included in this Guide, for further study of depreciation.
Points
What are points? They are charges paid by a borrower to take out a mortgage or a loan. 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 amount of points to amortize per year is no simple task. Contact a tax professional.
Repairs vs. Improvements
You must depreciate and capitalize all improvements to the property prior to putting it on the market. Improvements are those that 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.
Tax CPA +John Huddleston has written on accounting and other tax related subjects for many years. He is a graduate of Washington State University and the University of Washington School of Law.