Startup Expenses and Tax Breaks

This article focuses on deductible rental startup expenses. You are permitted to deduct select expenses you incur in preparing the property for rental, that is prior to renting the rental property.

NOTE: The startup expenses presented within this article are not the same type of expenses that qualify as a tax write-off within Internal Revenue Code section 195. Under the section 195, particular startup expenses (in an active business or trade) are deductible up to $5,000 with this balance amortizable over fifteen years. Though, under section 195 code, rental activity isn’t included since rental property is deemed a passive activity instead of an active business or an active trade. Find more information on this in the article entitled Tax Deductible Rental Losses.

NOTE: “Rental activity” begins the moment you place a property on the market, not when you have actually have a renter or a tenant.

The Expenses of Obtaining a Mortgage

Recording fees, mortgage fees, and abstract fees (amongst other fees) are capitalized and become part of your basis in the rental property. Instead of expensing these fees all at once, you need to depreciate these expenses. The Depreciation Expenses for Rental Properties article (within the Landlord Tax Guide) offers 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 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 no simple chore. Contact a tax professional.

Improvements versus Repairs

You must capitalize and depreciate all improvements to the property prior to putting it on the market. Improvements prolong the use of the property or materially add to 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.

Certified public accountant has written prolifically on accounting and tax related issues facing small business owners. He is a graduate of Washington State University and the University of Washington.

Seattle CPAsAbout Seattle CPAs
CPA for Dentists+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has been the owner of Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

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