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Level 1

Where do I depreciate start up costs for a rental house?

Do I have to fill out a schedule C to depreciate start up costs for a rental house, or is there somewhere to list these elements on schedule E?  I'm talking about repainting, etc., not property improvements, incurred before the home was rented.
7 Replies
Level 1

Where do I depreciate start up costs for a rental house?

Your rental start-up costs would be amortized on your Schedule E, not a Schedule C.  Your start-up costs are accumulated until you become operational.  Expenses such as pre-operational acquisition costs, investigation costs, proof-of-concept costs are included in start-up costs.  In the year you become operational you can deduct $5,000 of start-up costs with the balance spread over 180 months beginning with the first month you are operational.  You would list this expense in your return as “Start-Up Expense Amortization.”

Improvements and betterments to your rental property, however, would be included in the depreciation base for this asset.  

Level 1

Where do I depreciate start up costs for a rental house?

(a) Capitalization of expenditures
Except as otherwise provided in this section, no deduction shall be allowed for start-up expenditures.

<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/uscode/text/26/195">https://www.law.cornell.edu/uscode/text/26/195</a>
Level 1

Where do I depreciate start up costs for a rental house?

This is the preamble to IRC Sec 195.  The following Section, IRC Sec 195(b)(1) provides for "Allowance of Deduction."  The key is the phrase "except as otherwise provided . . . "
Level 1

Where do I depreciate start up costs for a rental house?

In order to qualify under Section 195, the expenditure must be one that would have been allowable as an ordinary and necessary deduction by an existing trade or business when it was paid or incurred.  

Section 195 is inapplicable to rental property because renting is not considered an active trade or business, but rather a passive activity.

Code Sec. 263 requires the capitalization of amounts paid to acquire, produce, or improve tangible property.

 Sec. 1.162-4, Income Tax Regs. Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, must generally be capitalized and depreciated in accordance with section 167.
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Level 1

Where do I depreciate start up costs for a rental house?

View2 has a good point about this being in the context of a rental. For a rental it would be best to capitalize and depreciate.
Level 1

Where do I depreciate start up costs for a rental house?

Some of the clarifications included in the new regulations:

Expenditures must be capitalized if they are for permanent improvements that increase the value of the property, substantially prolong its life, or adapt it to a new or different use.

Repair type expenditures made before the building or apartment is put in service (i.e. has a tenant) have to be capitalized.

Thus, the temporary regulations retain the bright-line rule that requires a taxpayer to capitalize costs that are incurred prior to the date a unit of property is placed in service.

T.D. 9564

Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property
Level 3

Where do I depreciate start up costs for a rental house?

moved to maryland in feb am i part year resident