This particular article of the Rental Property Tax Guide (“Guide”) focuses on deductible rental startup expenses. You may be able to deduct certain expenses you incur while preparing your rental property, but before actually renting it.
NOTE: The startup expenses discussed in this article are not the same type of expenses that are allowable as a deduction under section 195 of the Internal Revenue Code. Under that section, certain expenses incurred as startup expenditures in an active trade or business are deductible up front up to $5,000, with the balance amortizable over fifteen years. However, section 195 is inapplicable to rental property because renting is not considered an active trade or business, but rather a passive activity. See the article titled Tax Deductible Rental Losses, included in this Guide, for more on passive activity rules.
NOTE: 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
Expenses such as mortgage commissions, abstract fees, and recording fees, are 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.
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. (Note that repairs incurred prior to offering the property for rent must also 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.