Deduct Advertising Expenses For Rental Property Acquisition?

Question

This may be obvious, but I couldn't confirm in my NOLO deduction guide so asking here: I know I can write off the advertising costs associated with advertising my rental property once I own them, but can I deduct the advertising costs related to finding and acquiring my rental property?

For example, if I want to spend some money advertising to find my next rental (let's say via a direct mail campaign), can I write that off as a start-up or operating expense if the goal of the campaign is to acquire an off-market property to turn into a rental?

Thanks in advance for your input.

Ashish Acharya · Answer

Practical approach: If you already have a property then you could possibly prorate the expenses between property. If not already in business, then the cost would-be startup.

Costs incurred to investigate a new property are not considered start-up expenses once the decision to acquire a specific property is made.

Taxpayers getting started in a real estate rental business should deduct the costs of investigating properties and other related tasks as start-up costs and not business expenses until actively engaged in a rental business. In court case Woody, the Tax Court held that the taxpayer was not engaged in a property rental business until he began buying, selling, renting, offering to rent, flipping, or wholesaling property. See also the McPartland case

Note: Costs of acquiring an investment as opposed to an active trade or business cannot be amortized as start-up costs. The costs associated with the investment must be either capitalized as part of the cost of the investment or deducted as investment expenses. (Taxpayer acquiring real property to hold as an investment should make sure no start-up costs are capitalized to preserve the character of the property as an investment and ensure capital gain treatment on a future sale of the property.

Jason Phillips · Answer

Thank you @Greg Scott for the sound advice; I agree!And many thanks to @Ashish Acharya, that explanation was super helpful as you perfectly explained whether or not this would be a start-up expense or a cost capitalized as part of the cost of the investment or deducted as investment expenses. Appreciate you spelling that out, made a lot of sense. Thank you so much again.

Greg Scott · Answer

Any expense that is legitimately for business activities, can be deducted.  I don't think your example is even a gray area since it is specifically advertising for a property.  Of course, whether or not that has an impact on your taxes, is related to your specific circumstances.

I'd encourage you to find a good CPA and leave the free advice behind.  In my experience, you often get what you pay for and a good CPA can find ways to cut your taxes that you might never learn about otherwise.