Are Rental Property Losses Tax Deductible?

When a rental property sits empty, landlords lose expected income from vacancies or tenants who fail to pay rent. While the specific rent you did not receive cannot be claimed as a tax deduction, the ongoing costs of owning and maintaining the property during its vacancy can be. Understanding how to account for these expenses is an important part of managing a rental property’s finances.

Understanding Deductible Rent Loss

You cannot deduct income you never received. The rent payment you hoped to collect is considered unrealized income and does not qualify for a tax deduction. Because most individual landlords are cash-basis taxpayers, you cannot deduct uncollected rent because you never included it in your income in the first place.

The “loss” that is recognized for tax purposes stems from the ordinary and necessary expenses you continue to incur while the property is vacant but available for rent. As long as you are actively seeking a tenant and the property is ready to be occupied, the associated costs of holding that property are deductible. This shifts the focus from the lost rent to the actual cash outlays made to maintain the asset.

A different type of deductible loss can occur from a casualty or theft. If an event like a fire, flood, or other natural disaster renders your property unrentable, you may be able to deduct the loss in property value. This is not a deduction for lost rent, but a loss based on the property’s adjusted basis or the decrease in its fair market value.

Calculating Allowable Rental Expenses

During a period of vacancy when the property is available for rent, a landlord can continue to deduct the same types of operating expenses as when the unit is occupied. These costs are considered ordinary and necessary for managing and maintaining the rental property. Accurately tracking these expenditures is important for calculating your total deductible amount.

Common deductible expenses include:

• Mortgage interest paid on the loan used to acquire the property.
• Annual property taxes assessed by local governments.
• Premiums for insurance policies, including fire, theft, flood, and landlord liability coverage.
• Utility costs that you continue to pay during a vacancy, such as water, electricity, or gas.
• The costs of repairs and maintenance, which are actions taken to keep the property in good operating condition.
• Depreciation, the allowance for wear and tear on the property. For residential rental properties, the building’s cost is depreciated over 27.5 years, and you can continue to claim this even when the property is temporarily vacant.

Documentation for Rental Deductions

The IRS requires that you can prove the expenses you claim, and organized documentation is the only way to do so in the event of an audit. Records for income and operating expenses should be kept for at least three years after you file your tax return. Records that establish the property’s basis—such as closing statements and receipts for major improvements—must be kept for as long as you own the property, plus three years after you sell it.

For each category of expense, specific documents serve as proof. Mortgage interest is substantiated by the Form 1098, Mortgage Interest Statement, sent by your lender. Property tax payments can be proven with copies of tax bills and canceled checks or bank statements. You should also keep all insurance policy statements and receipts for premium payments.

For all other expenses, detailed receipts and invoices are necessary, including bills for utilities and invoices from contractors. To calculate depreciation correctly, you will need records showing the property’s original cost basis from the purchase. Keeping these records organized, whether digitally or physically, ensures you can accurately claim every deduction.

Reporting on Tax Form Schedule E

The primary form for reporting income and expenses from rental real estate is Schedule E (Form 1040), Supplemental Income and Loss. This form is attached to your main Form 1040 tax return. It is designed to systematically capture your rental activities for the year, leading to a calculation of your net profit or loss. Each rental property you own is listed in a separate column in Part I of the form.

You begin by reporting the total rents received for the year; if the property was vacant for the entire year, this amount would be zero. Below the income section is a list of expense categories. You will transfer the totals you calculated for each type of expense, such as insurance, mortgage interest, and property taxes, onto the corresponding lines.

Other expenses like repairs and utilities also have dedicated lines. The depreciation you calculated is reported on Schedule E as well. After listing all expenses and totaling them, you subtract the total from your income to arrive at your net rental income or loss. This final figure is then carried over to your main Form 1040.