Deductions & credits

Landlords often need to spend money to get their rental business started. Costs you incur before you are actually in business are called start-up expenses. Special tax rules govern the deduction of these costs. 

Start-up expenses are the costs you incur to get your rental business up and running. Any expense that would be deductible as an operating expense by an ongoing business is a start-up expense when it’s incurred before a business begins. Common start-up expenses for landlords include:

• minor or incidental repairs to get a rental property ready to rent
• outside office expenses paid for before a rental business begins, such as office rent, telephone service, utilities, office supplies, and office equipment rental
• home office expenses
• the cost of investigating what it will take to create a successful residential rental business, including research on potential real estate markets
• attending real estate seminars or conferences or other educational programs or classes
• insurance premiums (but not title insurance)
• maintenance costs for a rental property paid for before the property is offered for rent—for example, landscaping and utilities (but not the cost of connecting utilities)
• costs for recruiting and training employees before the business opens—for example, hiring and training an apartment manager
• fees paid to a market research firm to analyze the demographics, traffic patterns, and general economic conditions of a neighborhood
• business licenses, permits, and other fees, and
• fees paid to lawyers, accountants, consultants, and others for professional services; however, legal and other fees paid to purchase a rental property are not start-up expenses.

Unlike operating expenses, start-up expenses cannot automatically be deducted in a single year. This is because the money you spend to start a rental (or any other) business is a capital expense—a cost that will benefit you for more than one year. Normally, you can’t deduct these types of capital expenses until you sell or otherwise dispose of the business. However, a special tax rule allows you to deduct up to $5,000 in start-up expenses the first year you are in business, and then deduct the remainder, if any, in equal amounts over the next 15 years.

There is a limit on the amount of start-up expenses you are allowed to deduct the first year you are in business. For the past several years, the limit has been $5,000. You’ll have to deduct any expenses in excess of the first-year limit in equal amounts over the first 180 months (15 years) you’re in business. This process is called amortization. The 180 months is the minimum amortization period; you can choose a longer period if you wish (almost no one does).