Rental Property Acquisition Costs

By Jason Watson, CPA
Posted Saturday, August 3, 2024

The question comes up often- what costs can I deduct in the acquisition of a rental property. There are several, but the rub is that most expenditures associated with purchasing a rental property are considered costs (versus expenses) and are depreciated or amortized accordingly. As such, you get a deduction for acquisition expenditures, but it takes time.

Travel Expenditures

Travel expenses associated with start-up and acquisition have four important distinctions-

• Start-up travel costs, before a specific rental property is identified, are generally immediately deductible under IRC Section 195. There are limitations. See our start-up costs sections for more information.

• Acquisition travel costs including meals in a new geographical location. These are generally added to the purchase price of the rental property, and depreciated accordingly. Yuck.

• Travel expenses for additional rental properties in the same geographical location are generally immediately deductible as operating expenses. Yay.

• Travel costs, after you already have a rental property but in a different geographical location, are considered a new business venture and therefore would be considered start-up costs if you have not identified the target rental property. Once identified, the travel costs change to acquisition costs.

So, travel expenditures could be start-up costs, acquisition costs or operating expenses depending on timing, geography and whether you already own a rental property.

Sidebar: Did you also notice the word change between expenses and costs? Costs and expenses are similar concepts, and they’re sometimes used interchangeably. However, a cost typically refers to the price paid to acquire an asset such as a rental property, while an expense is an ongoing expense or associated with operations. This also aligns with the term cost basis when speaking about assets.

Let’s run through some examples. The first example highlights start-up costs so you can see the difference- you travel to Miami four different times looking at various rental properties each time, and you eventually identify and close on a nice condo. Prior to identifying the target business or in this case, the rental property, these expenses might be considered start-up expenses and therefore deductible.

IRC Section 195(c)(1) reads in part-

We expand on start-up costs in our getting the rental business launched section.

Next example- you’ve identified a nice rental property, and you travel to Miami four different times to a) do an initial walk-through, b) be present for inspections, c) sign-off on a seller repair and contingency and d) final walk-through and closing. The costs associated with these four trips to Miami would be considered acquisition costs (not start-up expenses) and added to the purchased rental property’s cost basis and depreciated accordingly.

Next example- you travel to Miami to look for and purchase another rental property. This is considered a business expansion, and travel expenses are considered operating expenses. This is an important distinction since these expenses are a) not considered start-up expenses which have limitations and b) not added to the purchase price as acquisition costs with the slow tax benefit of depreciation. Rather, they are generally immediately deductible.

Final example- you’ve had your fill of Miami and decided to pursue a rental property in Key West. This is likely to be considered a new business venture and therefore start-up expenses might be leveraged but you also have the downsides of adding acquisition costs to the purchase price and subsequent depreciation. In other words, the travel costs associated with Key West would not be operating expenses like the example above.

As a summary, travel expenditures could be start-up costs, acquisition costs or operating expenses depending on timing, geography and whether you already own a rental property. Here is a table that might be helpful as well-

New Location	Property Identified	Type	Deduction
Yes	No	Start-Up Costs	Deducted (limits)
Yes	Yes	Acquisition Costs	Depreciated
No	No	Operating Expense	Deducted
No	Yes	Acquisition Costs	Depreciated

We expand on all this in our rental property travel deductions section.

Meals During Acquisition

In playing off our travel deduction examples in another section, let’s say you’ve identified a nice rental property in Miami. You travel there four different times to a) do an initial walk-through, b) be present for inspections, c) sign-off on a seller repair and contingency and d) final walk-through and closing. You must eat right?

Assuming that your trips to Miami required overnight rest, or that you met with a business associate (real estate broker or prospective tenant), and happened to eat a meal during the meeting, the meals associated with these four trips to Miami would be considered acquisition costs (not start-up expenses) and added to the purchased rental property’s cost basis and depreciated accordingly.

This aligns with the general premise that a real estate investor or rental property owner might incur costs that facilitate a transaction, and they include such things as commissions, advertising fees, appraisal fees, meals, travel, and professional fees.

Closing Costs

Closing costs are commonly forgotten on rental property setups. Approach this by asking yourself what costs would I have incurred if the purchase was made with cash, and without borrowing. Those costs typically include abstract fees, charges for installing utility services, legal and recording fees, surveys, transfer taxes, title insurance, and any amounts the seller owes that you agree to pay (such as back taxes or interest, recording or mortgage fees, sales commissions and charges for improvements or repairs). This list is straight from the IRS website.

The amounts above are considered acquisition costs and are added to the cost basis of the rental property. Easy.

Loan Costs

What about loan costs? The costs beyond a cash deal? Unlike your primary residence, where you can only deduct qualified points and interest, you can amortize all costs associated with obtaining a new mortgage for your rental property over the life of the loan (usually 30 years). Common loan-related expenses include points, loan origination and loan assumption fees, mortgage insurance premiums, application fees, credit report fees and appraisal fees (if required by the lender).

Quick example. $3,000 in loan-related costs amortized over a 30-year loan would be $100 per year (and therefore deducted). Amortization is similar to depreciation but relates mostly to intangible assets such as goodwill, patents, copyrights, and loan costs.

Be careful of impound and prepaids on the closing disclosure or settlement statement. If you are asked to impound 6 months of mortgage interest or property taxes, these are not loan costs.

Other Acquisition Costs

Here are some more acquisition and closing costs that are commonly overlooked-

• Application fees, and similar expenses.

• Property appraisals and inspections including architectural, engineering, environmental, and geological services.

• Legal and accounting fees including tax advice to review offers, purchase or sales agreements.

• Costs to obtain regulatory approval or secure permits (think short-term rental permits).

• Cost of services provided by a qualified intermediary in a like-kind exchange.