Startup Expenses and Relevant Deductions

Specific expenses incurred in readying a rental property (before actually letting the rental property), are tax deductible. Let’s take a look at several of these expenses.

Note: Startup expenses laid out here, are dissimilar from the expenses allowable as a deduction (under Internal Revenue Code section 195.) According to that section, particular expenses incurred as startup expenditures in an active trade or business are deductible up to $5,000, with the balance amortizable over fifteen years. However, in this section of the Internal Revenue Code, rental activity isn’t included because rental activity is thought to be a passive activity not an active trade or business. Find more on active versus passive rules in the article entitled Tax Deductible Rental Losses.

Note: It isn’t when you’ve literally rented real estate 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 turned out to be part of your basis in the property. And this means that you have to depreciate these expenses, rather than expensing them all at once. See the article entitled Depreciation Expenses for Rental Property, included in this rental property tax guide, for more on depreciation.

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 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 venture. Talk to a Seattle tax professional.

Improvements versus Repairs

You need to depreciate and capitalize 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. 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.

Seattle Accountant  has written prolifically on accounting and other tax related subjects. He is a graduate of the University of Washington School of Law, holding a Masters in Tax Law and a Juris Doctorate.

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

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!

  • Huddleston Tax CPAs / Huddleston Tax CPAs – Seattle Accountants
    Certified Public Accountants Focused on Small Business
    40 Lake Bellevue Suite 100 / Bellevue, WA 98005
    (800) 376-1785

    Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching,
    QuickBooks consulting, bookkeeping, payroll, offer in compromise debt relief, and business valuation services for small business.

    We serve: Tukwila, SeaTac, Renton. We have a few meeting locations. Call to meet John C. Huddleston, J.D., LL.M., CPA, Lance Hulbert, CPA, Grace Lee-Choi, CPA, Jennifer Zhou, CPA, or Jessica Chisholm, CPA. Member WSCPA.