Ok, lots of incorrect information in every reply on this post to correct. The earlier response that said that costs before a property are placed in service can't be deducted anywhere is incorrect. The response that said "there are no start up costs since the IRS allows you to deduct costs if the intention is to rent the property" is also not correct. The reply that said rentals don't qualify as a trade or business is also not correct (usually).
Costs before a rental property is placed in service can be added to the cost basis of the property that you depreciate. You can just add the costs to the building cost basis, or enter them as a separate depreciation item. The start date of the depreciation would be the placed in service date. You cannot just deduct expenses from before the placed in service date as regular expenses.
The costs that you can add to the depreciation basis include mortgage interest and real estate taxes while you were getting it ready to be rented, travel expenses to go work on the property, utilities, pest control, and regular maintenance costs.
If anyone wants tax code references for this, see § 263 and § 1.263(a)-2(d).
Section 195 startup expenses
The short answer, is yes, rentals typically do qualify for Section 195 startup expenses. You can optionally choose to use section 195 for some types of startup expenses for rentals rather than adding those costs to the basis. Section 195 specifically doesn’t allow mortgage interest or property taxes, those costs must instead be capitalized. But other expenses may be deducted as startup expenses. But you have to be aware of all the nuances of the section 195, including what happens if your startup expenses are over $5000.
There was a discussion about whether a rental is a "trade or business". Most residential rentals are a section 162 trade or business. As Mercado v. United States says “Courts have consistently held that the rental of real estate is a "trade or business" if the taxpayer-lessor engages in regular and continuous activity in relation to the property. It has been held that a taxpayer who rents only a single parcel of real estate is engaged in the "trade or business" of renting real estate if his activities are regular and continuous. The fact that the plaintiffs employed agents to manage the real property does not make any difference.” Aside from that, there's an argument that section 195 also applies to § 212 Investment activities anyway.
Here are some court cases that confirm you can use section 195 startup expenses for rentals:
- Charlton v. Commissioner, 114 T.C. 333, 338 (2000) - Says their rental cabins aren't deductible yet but qualify for section 195 startup expenses.
- McPartland v. Commissioner, T.C. Sum. Op. 2012-88. Regarding rental expenses before a property is placed in service. "Startup expenditures, although not currently deductible, may generally be deducted over time pursuant to section 195."
