This write-up concentrates on deductible startup expenses for rental properties. You could be allowed to deduct a number of expenses incurred as you prepare the property for rental, but before renting it.
NOTE: These startup expenses outlined within this write-up will not be the same types of expenses allowed as a tax write-off within section 195 of the Internal Revenue Code. Under the section 195, certain startup expenses (in an active trade or business) are deductible up to $5,000 with this balance amortizable over fifteen years. Though, under section 195 code, rental activity isn’t included considering that rental property is perceived as a passive activity instead of an active business or an active trade. Find more information on active versus passive rules in the article titled Tax Deductible Rental Losses.
NOTE: “Rental activity” begins right when you place a property on the market, not when you have actually rented it.
Obtaining a Mortgage Expenses Incurred
Abstract fees, recording fees, and mortgage fees (amongst others) are capitalized and thus become part of your basis in the property. Rather than expensing these fees all at once, you need to depreciate the expenses. The article Depreciation Expenses for Rental Properties has further information on depreciation.
“Points” are charges paid by a borrower to take out a loan or a mortgage. These charges may also be called loan origination fees, maximum loan charges, or premium 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. Figuring out how many points to amortize per year is a complicated process beyond the scope of this article. Visit a tax professional.
Improvements vs. Repairs
You must capitalize and depreciate improvements to the property previous to putting the property on the market. Improvements prolong the use of the property or materially increase the property’s market value. Repair expenses, on the other hand, you may freely deduct. A repair maintains your property in good working condition without adding to its value or prolonging its use. See the series of articles about deductions and depreciation, included in this Guide, for more information.
Seattle Accountant +John Huddleston has written extensively on several tax related subjects. He is a graduate of the University of Washington School of Law.