Chapter 3 Frequently Asked Questions

By Jason Watson, CPA
Posted Sunday, May 25, 2025

Here are some FAQs you might find helpful as a summary to our chapter on initial asset management, which is nerdy real estate CPA speak for getting your rental property online-

Can I deduct costs incurred before I find a rental property?
Yes, up to $5,000 of start-up costs are immediately deductible if incurred before identifying the property. Costs beyond that are amortized over 15 years, and there are other limitations.

How should I classify travel expenses when buying a rental?
Before targeting a property: start-up. After identifying: acquisition cost. After in-service: deductible operating expense. Booyeah!

What does “in-service” mean for a rental property?
“In-service” means the property is ready and available for its intended use—functional, safe, and compliant with local laws—and is being actively marketed for rent. It does not require a tenant to be in place.

Can a rental be considered in-service if it’s awaiting a short-term rental permit?
No. If your intended use is as a short-term rental and you’re waiting on permitting, the rental property is not yet in-service, even if otherwise functional.

What does “held out for rental use” mean?
It means you’ve made bona fide efforts to rent the property, such as listing it, engaging with potential tenants, or hiring a property manager—and you can document these actions.

What’s the “in-service” rule’s impact on taxes?
It determines when depreciation begins and when expenses are deductible. Without in-service status, tax benefits are delayed.

Are closing costs deductible?
Most are not. They’re capitalized as acquisition costs or amortized, depending on their nature.

How do I treat loan costs?
Loan costs are amortized over the term of the loan. If you refinance, the remaining balance may be deducted immediately subject to passive loss limitations.

Are prepaid insurance and taxes deductible upfront?
Often yes, under the 12-month rule, if the benefit doesn’t extend past the next tax year.

Why are acquisition costs depreciated and not deducted?
Since these costs contribute to the long-term use of the rental property, the IRS requires you to capitalize them into the property’s basis for future depreciation.

Do furnishings qualify for immediate deduction?
Yes, if under $2,500 per item via the de minimis safe harbor, or under Section 179 expensing if eligible.

What are the risks of classifying furnishings as assets?
You may trigger depreciation recapture or personal property tax. Consider using the safe harbor instead.

When does depreciation begin for a rental property?
Depreciation starts when the property is placed in service- not when it’s first rented. It must be rentable, advertised, and legally permitted to operate as a rental. Sound familiar?

What’s the depreciation schedule for a rental property?
Residential: 27.5 years. Commercial and STRs: 39.0 years. Loan costs are amortized over the loan’s life.

How do I determine land vs. building allocation?
The easiest way is to use the assessor’s data ratio or appraisal. Only the building portion is depreciable.

Can I deduct pre-rental mortgage interest and property taxes?
Only if the property is in service. Otherwise, they may not be deductible or only partially deductible. We’ll say it again at the risk of annoying you- get that rental in-service as quickly as possible.

Can I capitalize carrying costs?
Yes, under IRC 266, you can elect to capitalize certain interest, taxes, and utilities and other costs to “carry the asset.”

Can I take a rental property offline for repairs and still keep it in-service?
Yes. If you intend to rent it again and it’s still held for the production of income, the property remains in service during temporary downtime for renovations.