If your rental property sat vacant for part or all of the past year, you might be curious whether the tax code still allows you to claim deductions on your ongoing monthly expenses.

The good news is that you can still deduct your expenses even when you don’t have rental income. 

Let’s delve into the details of deducting expenses for properties not currently generating income.

Expenses you can deduct when a rental property is vacant

Your rental property may be empty, but your tax benefits don’t have to vanish. You’re likely still eligible for the same tax deductions on monthly expenses as when your property is occupied, assuming your property is still “in service” and tenant-ready.

On Schedule E of your annual tax return, you can usually continue to claim mortgage interest, property taxes, insurance, maintenance costs, property management, and utilities, among other deductible expenses.

Doing this can help cushion the tax impact of those quiet months, providing a little relief when you experience a pause in your income stream.

How rental property loss carryforward works

If your rental property sits vacant long enough, you could end up with a passive activity loss (PAL), where your expenses are greater than your income.

However, the IRS only allows you to benefit from expense deductions up to the amount where your total gross rental income gets fully offset by these deductions.

That means that when your deductions exceed your income in a given tax year, the remaining loss often must be carried over to future tax years as a loss carryforward. This way, you can use your PAL and continue to offset income in future tax years until it’s fully depleted.

Example of a loss carryforward

A loss carryforward can be complicated. So, let’s break it down with an example.

Say you own a single-family rental property and charge $1,000 monthly rent. It sits vacant for three months of the year because it takes longer than expected to find a qualified tenant.

Here’s what your income statement might look like for the year:

Income and expenses from rental activity

Total rental income (9 months): $9,000

Deductions:

• Mortgage interest: $3,000
• Property taxes: $2,000
• Insurance: $1,500
• Depreciation: $4,000
• Other operating expenses: $3,500

Total deductions: $14,000

Net rental income (after deductions): $9,000 – $14,000 = (-$5,000)

Based on this example, you have no taxable income for the current year because your rental income is less than your expenses. With $9,000 in rental income but $14,000 in deductions, you end up with a net passive activity loss of $5,000.

This “excess” loss can be carried forward to the following tax years, reducing your taxable income as your property generates rent again until you use up the loss carryforward.

Deducting expenses before the property is placed in service or sold

When a property is not yet placed in service—meaning it’s not yet available for rent—you can still account for certain costs in your tax planning. These expenses may include initial repairs, maintenance, and other costs of making the property rent-ready. 

However, these expenses are not immediately deductible. Instead, they are capitalized, meaning you add them to the property’s basis and depreciate them over time.

Capital improvements, such as installing a new roof or renovating a kitchen, increase the value of your property, which makes them different from regular maintenance. As a result, you must capitalize and depreciate these improvements across their useful life, spreading the tax benefit over several years.

When preparing a rental property for sale, you must also account for repairs and improvements differently. While ongoing repairs are deductible, improvements intended to add to the property’s market value are added to its basis. That affects how much capital gains tax you may owe upon selling.

How to report depreciation deductions on a vacant rental

A common question is whether you can still claim depreciation deductions on a vacant rental.

The answer is yes, you can. As long as your property remains available for rent, it qualifies for depreciation deductions, regardless of whether it’s occupied.

Depreciation is based on the useful life of your property, which doesn’t pause during vacancy. The IRS considers it in service as long as you’re actively trying to rent the property or making it available, which allows you to continue deducting depreciation on your tax return.

As a reminder, depreciation on rental property is typically calculated over 27.5 years for residential properties. So, each year, you can deduct a portion of the property’s basis as a depreciation expense.

It’s important to note that the basis used for depreciation calculations excludes the land value, as land is not depreciable.

Key takeaways for smart tax planning

As a landlord, you can sometimes still claim normal operating expenses even when your property isn’t generating rental income.

Deductible expenses include insurance, property taxes, ongoing maintenance, and depreciation, among others. If your annual expenses exceed your income, the loss carryforward can allow you to offset taxable net income in future years.

Looking for more ways to streamline your rental property accounting and simplify tax planning? Consider signing up for a free account with Stessa, a comprehensive rental property accounting and management software built specifically for landlords. 

The Stessa platform can make your rental property accounting and tax prep more efficient through robust automations. You can easily organize and optimize your rental property finances, saving you time and maximizing your returns.

For example, Stessa categorizes transactions automatically, scans and stores receipts, and offers real-time financial reporting. Additionally, the platform has an intuitive mobile app, allowing you to manage transactions and monitor your portfolio from anywhere at any time. The Stessa Tax Center complements these features with a seamless tax preparation experience.

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