Startup Expenses and Tax Deductions

This segment concentrates on deductible rental startup expenses. You are allowed to deduct certain expenses incurred while preparing your rental property, but before renting it.

Note: Startup expenses laid out here, are dissimilar to the expenses which qualify as deductible (under section 195 of the Internal Revenue Code.) Under the section 195, a number of startup expenses (in an active trade or business) are deductible up front up to $5,000 with a balance amortizable over a fifteen-year time frame. 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. See the article titled Tax Deductible Rental Losses, included in this Guide, for a more focused study of passive activity rules.

Note: It is not just when you’ve literally rented real estate that rental activity commences, but when you make 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 develop into part of your basis in the property. This means that you have to depreciate these particular expenses, rather than expensing them all at once. Read the Depreciation Expenses for Rental Property article, 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. Determining the amount of points to amortize per year, is task beyond the scope of this article. Seek the counsel of a tax professional.

Repairs versus Improvements

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

CPA has written numerous articles on accounting and other tax related subjects. He holds a Juris  Doctorate and a Masters in Tax Law from the University of Washington School of Law.

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