The Deductions in Rental Startup Expenses
Note: It is not just once you have actually rented real estate that rental activity commences, but when you have made the property available for rent.
The Expenses of Obtaining a Mortgage
Recording fees, mortgage fees, and abstract fees (amongst others) are capitalized and so become part of your basis in the property. Instead of expensing these fees all at once, you have to depreciate these expenses. The article Depreciation Expenses for Rental Properties has further information relating to depreciation.
Points
What are points? They are charges paid by a borrower to take out a mortgage or a loan. This points or charges may also be called origination fees, or premium charges, or maximum loan 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. Determining the amount of points to amortize per year, is task beyond the scope of this article. Schedule a date with a tax pro.
Improvements vs. Repairs
You need to capitalize and depreciate improvements to the property previous to putting the rental property 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.
Certified public accountant +John Huddleston has written numerous articles on accounting and other tax related subjects. he is a graduate of Washington State University and the University of Washington.
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