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5. Deducting Startup Expenses From Rental Property

You can deduct expenses from rental properties before the property is rented. Preparation counts.

Startup expenses are not the same type of expenses as those allowed under the deduction under section 195 of the Internal Revenue Code. Under that section, startup expenditures in an active trade (or business) are deductible, up to $5,000, with the balance amortizable over fifteen years.

However, section 195 isn’t applicable to a rental property because renting is considered a passive activity rather than active trade or business. See the article titled Tax Deductible Rental Losses included in this Guide, for more on passive activity rules.

Rental activity begins when you make the property available for rent and place it on the market, not when you have actually rented it.

Expenses to Obtain Mortgage

Mortgage commissions, abstract fees, and recording fees are all capitalized and become part of your basis in the property. This means that you must depreciate these expenses, rather than expensing them all at once. See the article titled Depreciation Expenses for Rental Property included in this Guide, for more on depreciation.

What are Points?

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 the amount of points to amortize per year is a complicated process beyond the scope of this article. Consult a tax professional.

Improvements vs. Repairs

You must capitalize and depreciate all improvements you make to the property prior to putting it on the market. Improvements are those that 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. If you’ve made any repairs to the house before you offered it as a rental, then these expenses must be capitalized. 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.

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Rental Property Tax Guide Contents:

  1. Tax Forms For Reporting Rental Activity
  2. Best Entity For Rental Property Ownership
  3. Selling & Reporting Your Rental
  4. Taxable Vacation Home Rental Income
  5. How To Deduct Startup Expenses
  6. Home Office Deductions
  7. Personal Car & Public Transport Travel Expenses
  8. Depreciation Expenses
  9. Tax Deductible Rental Loss
  10. Non-deductible Expenses
  11. Tax Credits For Landlords
  12. LLCs For Real Estate Investments

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