Can You Write Off Expenses on a Vacant Property?

Deducting expenses for a vacant property depends on how the Internal Revenue Service (IRS) classifies its purpose. Property owners must understand these distinctions to ensure compliance and manage financial obligations. The tax treatment of a vacant property’s expenses is directly tied to its categorization, which can shift based on the owner’s activities and objectives.

Classifying Vacant Property for Tax Purposes

The IRS classifies vacant property based on the owner’s intent and the property’s actual or intended use. This classification can change over time, directly influencing which expenses are deductible. Property held for personal enjoyment, even if currently vacant, has limited tax benefits.

A property is considered personal use if the owner uses it for personal purposes for more than 14 days, or more than 10% of the total days it is rented out at a fair rental price, whichever is greater. For example, a vacation home used by the owner is classified as personal use. Deductions for such properties are limited to those allowed for personal residences, such as qualified mortgage interest and property taxes, reported on Schedule A.

Property held for investment is real estate acquired for appreciation or future income, not active trade or business. This includes undeveloped land or a building held for future sale, where the owner does not actively manage or rent. If a rental property is vacant for a long time or has only occasional occupants, it may be considered an investment property due to less active management. For investment properties, expenses like property taxes, mortgage interest, insurance, and maintenance are deductible against investment income.

Property held for business or rental purposes implies active owner engagement, even if temporarily vacant. The IRS considers a rental property a business if the owner demonstrates regular, continuous, and substantial activity aimed at earning a profit. This includes seeking tenants, managing repairs, and maintaining the property for rent. If a property previously used for rental becomes vacant but remains available for rent or sale, and the vacancy is temporary (e.g., less than a year), it retains its business or rental classification, allowing for the deduction of ordinary and necessary expenses.

Common Deductible Expenses

Owners of vacant property classified for business, rental, or investment purposes can deduct a range of ordinary and necessary expenses. These deductions reduce taxable income, reflecting the ongoing costs of maintaining the property. Eligible expenses depend on the property’s tax classification.

Property Taxes

Property taxes are deductible for real estate held for business, rental, or investment purposes. Internal Revenue Code Section 164 allows deductions for state and local real property taxes. Unlike personal residences, property taxes paid on investment or business property are not subject to the $10,000 limitation on state and local tax (SALT) deductions. The full amount of property taxes paid can be deducted.

Mortgage Interest

Mortgage interest paid on property held for rental or business use is a substantial deduction. Internal Revenue Code Section 163 permits the deduction of interest paid or accrued within the taxable year. For investment property, interest expenses are also deductible; however, the deduction for investment interest is limited to the taxpayer’s net investment income for the year. Any disallowed interest can be carried forward to succeeding tax years.

Insurance Premiums

Insurance premiums, including landlord, liability, fire, flood, and mortgage insurance, are deductible expenses for vacant properties held for rental, business, or investment. These premiums are ordinary and necessary costs for protecting the asset and its potential income stream. This deductibility applies even during vacancy, provided the property remains insured and available for its intended use.

Utility Costs

Utility costs, such as electricity, water, and gas, are deductible for vacant rental or business properties. Even when temporarily unoccupied, utilities may be necessary to prevent damage, maintain systems, or prepare for new tenants. As long as the property remains “in service” and available for rent, these expenses can be claimed. Many utility companies offer landlord accounts, facilitating service transfer and accurate tracking of deductible costs during vacancy.

Maintenance and Repair Expenses

Maintenance and repair expenses are fully deductible in the year incurred for properties used in a trade or business or held for income production. These costs keep the property in good operating condition without significantly adding to its value or extending its useful life. Examples include fixing a leaky faucet, patching walls, or repairing appliances. Repairs maintain the property, while improvements, which enhance its value or prolong its life, must be capitalized and depreciated over time.

Depreciation

Depreciation is a non-cash deduction allowing owners to recover the property’s cost (excluding land) over its useful life. For residential rental property, the recovery period is 27.5 years under Internal Revenue Code Section 167. Depreciation can continue to be claimed even when a rental property is vacant, provided it remains “in service” and actively available for rent. This deduction reflects the wear and tear and obsolescence of the building and its components.

Advertising Costs

Advertising costs to find new tenants or sell the property are deductible. This includes expenses for online listings, print advertisements, flyers, or other marketing materials. These costs are ordinary and necessary business expenses aimed at generating income from the property.

Applying Specific Tax Rules

Specific tax rules apply when deducting expenses for vacant property, potentially limiting or guiding how deductions are applied. Understanding these conditions is important for accurate tax reporting and to avoid issues with the IRS. These rules focus on the activity’s nature, profit motive, and property conversions.

Passive Activity Loss (PAL) Rules

The Passive Activity Loss (PAL) rules, outlined in Internal Revenue Code Section 469, impact the deductibility of losses from rental properties. Rental activities are considered passive, meaning losses can only offset income from other passive activities. This prevents taxpayers from using rental losses to reduce income from wages or other active business endeavors.

An exception to the PAL rules exists for real estate professionals who materially participate in their rental activities. If a taxpayer qualifies as a real estate professional and materially participates, they may deduct rental losses against non-passive income. Material participation is determined by satisfying one of seven IRS tests, such as participating in the activity for more than 500 hours during the tax year. For those who do not qualify as real estate professionals but “actively participate” in a rental activity, a special allowance permits the deduction of up to $25,000 in rental losses against non-passive income, though this amount phases out for higher adjusted gross incomes.

Hobby Loss Rules

The Hobby Loss Rules, under Internal Revenue Code Section 183, apply if the IRS determines an activity, including holding vacant property, is “not engaged in for profit.” If an activity is deemed a hobby, deductible expenses are limited to the income generated, meaning no tax loss can be claimed. The IRS considers nine factors when determining profit motive, including how the activity is conducted, the taxpayer’s expertise, time and effort expended, and whether the property may appreciate in value. A presumption of profit motive arises if the activity shows a profit in at least three out of five consecutive tax years.

Converting a Personal Residence to a Rental Property

Converting a personal residence to a rental property involves distinct tax implications, particularly concerning the property’s basis. For depreciation, the basis is the lesser of the property’s fair market value (FMV) or its adjusted basis (original cost plus improvements) on the date of conversion. When the converted property is sold, the basis used to calculate gain is its adjusted basis at the time of sale. If the sale results in a loss, the basis used is the lesser of the adjusted basis or the FMV on the conversion date, preventing the deduction of personal use losses.

Capitalization and Expensing

A distinction in accounting for property expenses is between capitalization and expensing. Repairs are costs that maintain the property in its ordinary operating condition and are deductible in full in the year incurred. In contrast, improvements, which add value, prolong the property’s useful life, or adapt it to new uses, must be capitalized. The cost is added to the property’s basis and recovered through depreciation over several years. The IRS provides guidance, including “safe harbor” rules, to help property owners correctly classify these expenditures.

Record Keeping and Reporting Requirements

Accurate and comprehensive record keeping is essential for property owners to substantiate deductible expenses for vacant properties. Documentation of all income and expenditures is necessary to ensure compliance with tax regulations and to support claims in an IRS inquiry. This includes maintaining invoices, receipts, bank statements, and canceled checks for all property transactions.

For each vacant property, keep separate records detailing its address, type, and the number of days it was available for rent versus personal use. Documentation for repairs, maintenance, and capital improvements should clearly differentiate these expenditures, as their tax treatment varies significantly. Retain receipts for property taxes, mortgage interest, insurance premiums, and utility bills, along with records of any efforts to rent or sell the property.

Individual property owners report rental income and expenses on Schedule E (Form 1040), Supplemental Income and Loss. Each rental property should be listed separately on this form, detailing its income, expenses, and depreciation. Property taxes and mortgage interest related to a personal residence are reported on Schedule A (Form 1040) if itemizing deductions, but these expenses for rental or business properties are reported on Schedule E.

Partnerships and S corporations that own rental real estate use Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation, to report financial details. Regardless of the entity structure, depreciation, a non-cash expense, is calculated on Form 4562, Depreciation and Amortization. The resulting deduction is then transferred to either Schedule E or Form 8825. Property owners should consult IRS Publication 527, Residential Rental Property, and Publication 550, Investment Income and Expenses, for guidance on record keeping and reporting requirements.