Are you interested in becoming a commercial or residential landlord?
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If so, you’ll likely have to spend a considerable amount of money before ever collecting rent, and the tax code treats some of the amount spent as start-up expenses.
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Start-up expenses are some of the costs you incur before you offer a property for rent. There are two broad categories:
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Investigatory
Pre-opening costs, such as advertising, office expenses, salaries, insurance, and maintenance costs
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Your cost of purchasing a rental property is not a start-up expense. Rental property and other long-term assets, such as furniture, must be depreciated once the rental business begins.
On the day you start your rental business, you can elect to deduct your start-up expenses.
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The deduction is equal to
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the lesser of your start-up expenditures or $5,000, reduced (but not below zero) by the amount by which such start-up expenditures exceed $50,000, plus
amortization of the remaining start-up expenses over the 180-month period beginning with the month in which the rental property business begins.
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When you file your tax return, you automatically elect to deduct your start-up expenses when you label and deduct them on your Schedule E (or other appropriate return).
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Costs you pay to form a partnership, limited liability company, or corporation are not part of your start-up expenses. But under a different tax rule, you can deduct up to $5,000 of these costs the first year you’re in business and amortize any remaining costs over the first 180 months you are in business.
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Note that the cost of expanding an existing business is a business operating expense, not a start-up expense. As long as business expansion costs are ordinary, necessary, and within the compass of your existing rental business, they are deductible.
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The IRS and tax court take the position that your rental business exists only in your property’s geographic area. So, a landlord who buys (or seeks to buy) property in a different area is starting a new rental business, which means the expenses for expanding in the new location are start-up expenses.
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You can’t deduct start-up expenses if you’re a mere investor in a rental business. You must be an active rental business owner to deduct them.