Getting The Rental Business Launched

By Jason Watson, CPA
Posted Tuesday, July 7, 2026

There are four types of expenditures that you might have outside of the rental property purchase itself-

• Start-Up Costs such as Investigatory, Organizational (LLC formation, legal and professional fees) and Pre-opening Expenses. These are expenses incurred while preparing to enter the rental business, generally before the property is placed into service. They often occur before a target property is identified, but may also occur after identification provided they do not facilitate the acquisition itself.

• Real Estate Acquisition Costs.

• Lost Expenses (no sneak peek).

• Furnishings and Supplies (business-related expenditure).

We’ll skip real estate acquisition costs since we have an entire section dedicated to that but dive into the other three (especially rental property start-up costs).

Start-Up Costs (Investigatory, Organizational and Pre-opening Expenses)

You may deduct up to $5,000 of the following start-up expenditures (we list some of the most popular) in the year the rental activity begins, subject to the phaseout and amortization rules below-

• Professional fees paid to lawyers, accountants, consultants, etc. to assist with getting the entity formed, drafting a sample lease, etc. Similar fees in connection with the purchase, however, are acquisition costs and are added to the basis of the rental property.

• Business licenses, permits, and other fees. These are not for the rental property itself, but rather general business licenses and permits.

• General real estate research (think AirDNA subscription) and best business practices, including educational seminars or conferences.

You may deduct up to $5,000 of start-up expenditures in the year the rental activity begins. That $5,000 is reduced dollar-for-dollar once total start-up expenditures exceed $50,000. The remainder is amortized over 180 months beginning with the month the active rental business begins.

Let’s back up a bit since there is a fine line between start-up costs and acquisition costs. IRC Section 195(c)(1) defines “start-up expenditure,” in part,

as any amount (A) paid or incurred in connection with investigating the creation or acquisition of an active trade or business, and (B) which, if paid or incurred in connection with the operation of an existing active trade or business (in the same field as the trade or business referred to in subparagraph (A)), would be allowable as a deduction for the taxable year in which paid or incurred.

However, once you identify the target business, and in the context of this book, the target rental property, you need to ask a better question: does the expenditure facilitate the acquisition, or does it help launch the rental operation? Yes, there is a difference!

Costs that facilitate buying the property, such as inspections, appraisals, negotiation, title work, closing, and legal fees tied to the purchase, are generally acquisition costs and must be capitalized. Costs that help launch the rental activity, such as furniture, supplies, listings, cleaners, property manager onboarding, books and records, and guest or tenant setup, require a separate analysis. They might be start-up expenditures, operating expenses, carrying costs, or capital assets depending on timing, purpose, and placed-in-service date. We dive deeper into these launch costs in our furnishings and supplies section, but first, here is a nice summary from IRS Revenue Ruling 99-23. Yeah, way back when, but still relevant.

Expenditures incurred in the course of a general search for, or investigation of, an active trade or business in order to determine whether to enter a new business and which new business to enter (other than costs incurred to acquire capital assets that are used in the search or investigation) qualify as investigatory costs that are eligible for amortization as start-up expenditures under § 195. However, expenditures incurred in the attempt to acquire a specific business do not qualify as start-up expenditures because they are acquisition costs under § 263. The nature of the cost must be analyzed based on all the facts and circumstances of the transaction to determine whether it is an investigatory cost incurred to facilitate whether and which decisions, or an acquisition cost incurred to facilitate consummation of an acquisition.

Said differently, and perhaps Captain Obviously, please do not confuse “acquisition costs” with “pre-opening expenses.” Pre-opening expenses occur after the decision to enter the rental business but before the activity actually begins (before the property is placed in service). These costs include expenses related to advertising, acquiring tenants or guests (Airbnb or Vrbo initial setup costs), professional services, setting up books and records such as QuickBooks Online, Xero, REIHub, etc.

As the tax code puts it, these pre-opening activities are engaged in “in anticipation of such activity becoming an active trade or business.” Because you are doing these things specifically to get the doors open and launch the operation, they are generally valid start-up expenditures under IRC Section 195, provided they would have been deductible if incurred in an existing rental business and are not acquisition costs, capital expenditures, interest, taxes, or other excluded costs.

Possible Lost Expenses

Now let’s talk about a different kind of pre-opening expenditure: the stuff you pay just to carry the property between the closing date and the available-for-rent date (in-service date). What about mortgage interest, property taxes, insurance, and utilities while you are getting the rental ready?

Why aren’t these just lumped in with your pre-opening start-up expenditures? Because the IRS draws a hard line between creating a business and carrying an asset.

IRC Section 195 is designed for expenditures that build the business framework. The tax code explicitly excludes interest and taxes from being treated as start-up costs. Utilities and insurance fall into a similar bucket since they are carrying costs that merely maintain the physical property, rather than activities executed in anticipation of launching the business.

Here is the abbreviated language from IRC Section 195–

1) Start-up expenditure The term “start-up expenditure” means any amount—
(A) paid or incurred in connection with—
(i) investigating the creation or acquisition of an active trade or business, or (ii) creating an active trade or business,

Blah blah blah

The term shall not include any amount with respect to which a deduction is allowable under section 163(a), 164, or 174.

Section 163(a) is the code section for deducting interest. Section 164 is the code section for deducting taxes such as property taxes. Because the rental activity has not yet begun, those deductions may not yet be allowed under IRC Sections 163 or 164 either. Wow, more bad news.

That sums up the spirit of IRC Section 195 and how it feels about carrying costs: not warm. Not fuzzy.

In line which with we just learned from IRS Revenue Ruling 99-23 and IRC Section 195, these expenditures are not considered start-up costs and can pose a real problem for real estate investors. You could possibly deduct the mortgage interest as a second home, but further discussion is required. You might be able to deduct the property taxes subject to the current $10,000 combined state and local tax limitations on Schedule A of your Form 1040 tax return.

What’s the answer? The answer is to get that rental property ready and available for rent and let the world know as soon as possible. Place it in-service like now.

You purchase a rental property on July 1, and it is generally ready to rent. Nothing says you must immediately pay a bunch of money for fancy pictures, staging and Vrbo listings. The rental property is available with nothing more than your willingness and a yard sign. Then you can start shooting the money cannon.

Nothing says you must also align your rent fee with market conditions; for example, you buy a ski condo on September 1. No one is going to rent your condo until at least Thanksgiving, but it is available to rent, and as such you are no longer in the start-up phase.

Finally, nothing says you cannot have the rental property available for rent, and simultaneously be painting various bedrooms and walls waiting for your first tenant or guest.

Nothing has a lot to say, right?

The point is this: a) ready and available for occupancy and b) being held out for rental use (advertising and related efforts) is the standard we care about. The asset is deployed for its intended purpose which is to produce income. Know the rules. Assert your facts accordingly. See our rental property in-service defined section for more information.

Sidebar: If you are constructing a rental property, then usually the construction loan interest and interim property taxes will be capitalized and added to the ultimate cost of construction. See our capitalizing construction mortgage interest section for expanded thoughts on this nugget.

Carrying Costs

As you can see you might be in no-man’s land or what some call “pre-rental status” or “pre-opening” where the rental property has never been rented before and is not yet ready for occupancy. Not all is lost during the time between closing and when the rental property is placed into service (ready and available for occupancy, and held out for rental use through advertising and related efforts). How?

If you elect under IRC Section 266 to capitalize certain taxes and carrying charges, the election is made annually on a timely filed tax return. This is fancy accounting-speak for taking certain expenditures that you incur to carry the property and adding them to basis instead of deducting them currently. Common carrying charges might include-

• Mortgage interest
• Property taxes
• Insurance
• Utilities, such as electricity, gas and water
• HOA dues
• Maintenance and security expenses

Be careful. Calling something a carrying cost does not automatically mean Section 266 allows you to capitalize it in every situation. Section 266 works best with unimproved or unproductive real property, or during a real construction, development, renovation or improvement period. If you simply buy an improved rental property and it is sitting there before being placed in service, the Section 266 analysis gets murkier. The expenditure must still fit within the regulatory categories for taxes and carrying charges.

How does this immediately help you? It doesn’t. However, it allows you to deduct these expenditures in the future through depreciation, or recover them when you sell the rental property. See our capitalizing construction interest and carrying costs section for a bunch more information.

When The IRS Argues It Isn’t A Trade Or Business

Start-up expenditures under IRC Section 195 only apply when you are preparing to enter an active trade or business. Most residential rentals qualify without debate because the owner advertises, manages tenants, coordinates repairs, and oversees the property’s operation.

However, if you are buying a triple-net lease (NNN) commercial property where the tenant handles taxes, insurance, and maintenance, the IRS might argue you are merely holding a passive investment, not operating a business. This is rare, but illustrates or underscores or highlights (take your pick) a critical distinction: investment-related spending is not Section 195 start-up spending. Business-related spending is. Subtle, Yes.

Recap of Getting the Rental Business Launched

A real estate investor could look at three discrete buckets of expenditures depending on different phases or timelines as you go from no rental to your first tenant or guest-

• You are considering purchasing your first rental property, but haven’t targeted one in particular. You incur some costs for a conference and for your pals at WCG CPAs & Advisors to assist in launching an LLC. These are start-up costs under Section 195. If the rental activity actually begins, up to $5,000 may be deducted in the year the activity begins, with the remaining amount amortized over 180 months. The $5,000 deduction is reduced once total start-up expenditures exceed $50,000. Yuck.
• You target a rental property, and incur travel related expenditures to inspect the property and close the deal. These are acquisition costs, and are added to the depreciable cost basis of the acquired property (and depreciated over 27.5 for residential or 39.0 years for commercial / short-term).
• You have several expenditures buying kitchen wares, linens, supplies and furnishings. These are business-related expenditures to get your rental property activity underway, but timing matters. If the rental activity already exists, many small-dollar items can be deducted under the de minimis safe harbor. If the rental activity has not yet begun, those same items might be start-up expenditures under Section 195. Larger furnishings and equipment are usually depreciable assets, often eligible for bonus depreciation or Section 179 expensing where available. We talk about all this in a later section.