Deducting Startup Expenses for a Rental Property

Ultimate Real Estate Investor Tax Guide ยป

This article is about how to deduct expenses that occur after you buy a rental property, but before it is actually available to rent. Depending on the circumstances, this “pre-rental” period of time could be a month, or it could be years.

The Placed-in-Service Date

A key concept when figuring startup expenses for a rental property is the placed-in-service date. It’s an important concept because expenses that are handled differently depending on whether the costs occurred before or after this date. The placed-in-service date is the date you first make the property available for rent. So that means the property must be immediately available for move-in, and you have also publicized the availability of it as a rental in some way (Zillow, Facebook Marketplace, a yard sign, etc.). So it doesn’t have to be the date the first tenant moves in, it’s just the date it was available to be rented. If you buy a property with tenants already in place, the date is just the closing date of the purchase.

It’s generally to your advantage to place the property in service as soon as possible, so you can begin deducting expenses like mortgage insurance and property taxes. There may also be other tax advantages, such as qualifying for more bonus depreciation if you eventually do a cost segregation study because the amount of bonus depreciation you can take can vary in different tax years.

For expenses that occur after the placed-in-service date, see our article on rental expenses. This article is all about how to handle costs that occur before the property’s placed-in-service date.

Expenses Before the Placed-in-Service Date

Expenses that you incur while getting the property ready to rent for the first time are expenses that you can add to the cost basis of the property. Examples of these types of expenses include:

  • General market research house search costs related to this specific property.
  • Travel costs before the property purchase, when looking at properties in the same location as the property you bought.
  • Legal and accounting fees
  • Travel expenses when going to the property to work on it.
  • Mortgage interest
  • Utilities
  • Property taxes
  • Lawn care
  • Pest control
  • Regular maintenance costs
  • Renovation costs
  • Furniture and other supplies

For yearly costs like property taxes and insurance, you’ll need to calculate the portion of the period that applied to the time before and after the property was placed in service. The portion before is added to your cost basis, the portion after is a deductible expense for that tax year.

These costs can be added to the basis of the property, which is depreciated over the lifetime of the property (27.5 or 39 years, depending on whether it is a short term or long term rental).

Personal Use

Most of these expenses we’ve listed can only be included if you are holding the property for the purpose of making it a rental property. If the property is not vacant, or you are using the property for personal use, then day-to-day expenses like repairs, maintenance, mortgage interest, utilities, and property taxes during that time should not be included. But if you do significant work on the property that is considered to be an improvement to the property (renovation), the cost of that can be added to your cost basis for the property that you depreciate when you convert it from personal use to a rental. Regular repairs and maintenance during the personal use period shouldn’t be included.

Separately Depreciating Items

If you have significant expenses for items that are not part of the structure of the building, such as furniture or appliances, these types of items can optionally be depreciated separately on a shorter time period than is required for the building itself. Items with a depreciation life of 20 years or less may also be eligible for bonus depreciation.

This article is part of The Ultimate Real Estate Investor Tax Guide.

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David Orr

I am a credentialed tax professional with a primary focus on tax preparation and advising for real estate investors. Have tax questions or want me to do your taxes? Contact us.

This article was written or updated in 2023 or 2024 and is current for the 2023 and 2024 tax years.

The information presented here is meant for guidance purposes only, and not as personal legal or tax advice.