Rental properties are a source of income for landlords and, as such, they also generate income tax deductions.
When a rental property is vacant, a landlord remains able to claim deductions despite the loss of rental income. The Internal Revenue Service has specific guidelines regarding claiming expenses related to a rental property when the property is vacant.
The IRS refers to ordinary and necessary expenses in reference to rental property, so a clear understanding of the terms is a must when determining what expenses can be deducted when your property is vacant.
Ordinary and necessary expenses for vacant rental properties are the costs of managing, conserving and maintaining the property.
Examples include the cost of electricity used while showing the property, payments made for lawn maintenance and the cost of repairs made to keep the property in good operating condition.
As long as your rental property is out for rent while it is vacant, local taxes are considered an ordinary expense eligible for deduction. Interest on a mortgage loan is also an expense that can be deducted.
It is important to consider the difference between maintaining a rental property and improving the property when deducting expenses on a vacant unit. Improvements are not an even money deduction, they are depreciated over time because they increase the value of your property.
When you take the opportunity to improve a rental while it is vacant, log the improvements separately from the ordinary and necessary expenses incurred in the same time period. After the improvement is completed, it can be claimed as a deduction for the remainder of the time the property is vacant and over a multiyear period through depreciation.
When your rental property is vacant after the departure of one tenant, you are able to deduct certain expenses until a new renter is found. Ordinary and necessary expenses are eligible for deduction during this time period. You can also include the amount of time a property spent vacant in your depreciation calculations for the property during the tax year. However, you are not allowed to report the amount of lost rent while the property was vacant on your taxes as a loss of income
When you decide to sell a rental property and it becomes vacant, you remain able to claim ordinary and necessary expenses incurred while keeping the property in ready-to-sell condition.
All common ordinary and necessary expenses are deductible, but there are also additional costs related to the expense of selling a property. Any upfront real estate agent fees, listing fees for ads in commercial property publications and other promotional expenses tied to the potential sale are also necessary costs and, therefore, deductions.