First-year landlord taxes: startup costs and placed-in-service

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: Rental expenses become deductible when the property is ready and available for rent, not when the first tenant moves in. Costs before that point are mostly added to basis or, if the rental is a trade or business, may be start-up costs under section 195. Depreciation starts on the placed-in-service date using the mid-month convention, so a property placed in service in October gets only a sliver of a year.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage; the IRS pays for the roof (eventually, over 27.5 years). The first year is where that deal gets written down. Your first Schedule E sets the depreciable basis, the date depreciation starts, and how every pre-rental cost was treated. Getting it right is mostly about timing.

The core rule from IRS Publication 527: you can deduct ordinary and necessary expenses for managing, conserving or maintaining rental property from the time you make it available for rent. Before that, different rules apply.

CPA Warning Label: The first return sets your basis, your depreciation schedule and your records. Mistakes here repeat for 27.5 years.

Startup and pre-rental expenses

Costs before the property is available for rent fall into three buckets:

• Acquisition costs added to basis. Settlement fees and closing costs to buy the property, such as abstract fees, recording fees, surveys, transfer taxes, title insurance and legal fees, are added to basis (Publication 527 and Publication 551). Real estate taxes and interest before rental are a special case below.
• Improvements and rehab before renting, including work to make the property rentable, are capitalized and depreciated once placed in service. Even repair-type work done as part of a larger renovation before placing in service is often capitalized; see capital improvements list.
• Start-up costs. If your rental activity rises to a trade or business, investigatory and pre-opening costs, such as travel to look at markets, advertising before availability or training, may be start-up expenditures under section 195. You can deduct up to $5,000 in the year the business begins, reduced dollar-for-dollar by start-up costs above $50,000, and amortize the rest over 180 months. Whether a single long-term rental is a trade or business is a facts-and-circumstances question; for an investment activity, many such costs simply become part of basis or are not deductible.

Interest and taxes before rental

Mortgage interest and real estate taxes paid after purchase but before the property is available for rent are generally deductible, or can be capitalized under section 266 by election. Taxes the seller owed that you paid at closing are added to basis. Treatment of pre-rental interest for a property under construction differs (section 263A can require capitalization). This is an area to confirm with your preparer.

Loan costs

Points and loan fees on a rental loan are amortized over the loan term; see rental mortgage interest and amortizing loan fees.

Placed-in-service date

Publication 527 says you can begin to depreciate rental property when you place it in service for the production of income. Property is placed in service when it is ready and available for a specific use, which for a rental means ready and held out for rent, even if no tenant has moved in.

• Listed on Zillow on Sept 10 with the rehab done: placed in service Sept 10, even if the first lease starts Nov 1.
• Bought Jan 15, rehab until April 20, listed April 21: placed in service April 21.
• Your former home converted to rental: placed in service when available for rent, with basis equal to the lesser of adjusted basis or fair market value on that date (Publication 527).

Evidence matters: listing screenshots, advertising receipts and showing logs show the date. If a property is placed in service late in the year, the first-year depreciation is small, but expenses from the availability date still count in full.

Partial-year depreciation

Residential rental buildings use 27.5-year straight line under MACRS with the mid-month convention: property is treated as placed in service in the middle of the month. So the first-year percentage depends on the month (Publication 946, Table A-6):

Land is never depreciated, so you must allocate the purchase price between land and building, commonly using the county assessor's ratio.

Appliances, carpet and furniture are 5-year property, and land improvements are 15-year property, usually with the half-year convention unless the mid-quarter convention applies because more than 40% of the year's personal property was placed in service in the last quarter. Under the 2025 tax law, 100% bonus depreciation applies to qualifying property acquired after Jan. 19, 2025 (per IRS guidance as of Oct 2026), and buildings themselves are not eligible.

Illustration: Fran buys a rental duplex for $330,000 in 2026 and adds $6,000 of closing costs. The assessor shows 20% land. Building basis: $336,000 times 80% = $268,800. She places it in service July 12. First-year depreciation: $268,800 times 1.667% = about $4,481. A full year after that: $268,800 / 27.5 = about $9,775. See real estate depreciation.

Vacant-for-rent counts

A property that is ready and listed but empty is a rental. Publication 527 says that if you hold property for rental purposes, you may be able to deduct ordinary and necessary expenses, including depreciation, for managing, conserving or maintaining it while it is vacant. You cannot deduct loss of rental income for the period it is vacant.

The test is whether you genuinely hold it out: an advertised, market-rate listing. A "for rent" sign on a house you're still painting and won't show doesn't count. See vacant rental deductions for long vacancies.

First-year passive loss

Many first-year rentals show a loss: a few months of rent, a full year of costs before availability added to basis, and depreciation. That loss is passive. Whether it offsets your wages depends on your income and the $25,000 allowance; see rental losses and W-2 income.

First return checklist

1. Closing disclosure. Separate basis items (fees, title, transfer tax) from deductible items (prorated property taxes you paid, interest) and from loan costs to amortize.
2. Land/building allocation with support.
3. Placed-in-service date with evidence.
4. Asset list separated into building, improvements, appliances and furniture; consider whether a cost segregation study is worth it for a larger property.
5. Form 4562 for depreciation in the first year.
6. Rents received, including advance rent (taxable when received) and security deposits (not income if refundable, per Publication 527).
7. Expenses by category after the availability date. Set up a bookkeeping system now.
8. Mileage log for trips to the property; see landlord mileage.
9. Form 1099-NEC for contractors you paid $2,000 or more for 2026 services, if your rental is a trade or business; see landlord 1099 requirements.
10. Personal use days, if any, which could trigger the vacation-home rules.
11. State and local registration, such as rental licenses, which may have deductible fees.
12. Records retention: keep basis records for as long as you own the property plus at least three years after the return reporting the sale.

Common first-year mistakes

• Expensing the entire rehab before listing.
• Depreciating the land.
• Starting depreciation at the lease date instead of availability date.
• Treating the security deposit as income when it is refundable, or forgetting to include last month's rent collected in advance.
• Missing the land allocation documentation, so the IRS uses its own ratio on exam.
• Mixing personal and rental funds in one account, which makes every expense harder to prove.

A first-year illustration of the whole return

Illustration: Continuing Fran's duplex (placed in service July 12, 2026): rents of $2,400 a month for five months = $12,000, plus a $2,400 refundable deposit (not income). Expenses from July 12: interest $7,000, taxes $2,000, insurance $700, repairs $800, advertising $150, mileage $300. Depreciation $4,481 plus a $3,000 appliance package that qualifies for 100% bonus depreciation. Net Schedule E: $12,000 minus $18,431 = a loss of $6,431. If her MAGI is under $100,000 and she actively participates, that loss can offset her wages. If not, it is suspended and carried forward.

• Forgetting the closing costs in basis, which understates depreciation for 27.5 years. A missed depreciation method is generally corrected with Form 3115, not an amended return, after two years of the wrong method.