You can deduct certain expenses on vacant rental property, including costs like mortgage interest, property taxes, and maintenance, as long as the property is available for rent. These deductions can help you save money during a vacancy period.
This article will answer all your questions and guide you through the process. Continue reading to learn about the expenses you can claim and the best practices to follow for a smooth tax season.
Understanding Rental Property Tax Deductions
Rental property tax deductions are expenses related to your property that can reduce your taxable income. These can include costs for mortgage interest, property taxes, repairs, and maintenance. The IRS Pub 527 allows you to deduct these expenses as long as the property is used to generate rental income.
Even if your property is vacant but available for rent, certain deductions may still apply. Understanding these deductions can help you save money and keep your rental property business running smoothly. It’s important to keep records of all expenses for accurate tax filing.
Allowed Deductions for Vacant Rental Property
Vacant rental properties still incur costs that can be deducted to lower your taxes. Even though there are no rental income streams, these deductions can make a significant difference when filing your taxes.
Here’s a breakdown of allowed expenses for vacant rental properties.
Mortgage Interest
You can deduct mortgage interest on your vacant rental property. This deduction applies to the interest portion of your mortgage payment, which helps reduce your taxable income. Keeping accurate records of your mortgage payments during the vacancy period ensures you’re not missing out on valuable deductions. Just make sure the property is available for rent.
Property Taxes
Property taxes on your vacant rental property are deductible, even though the property isn’t generating income. These taxes are considered necessary expenses for maintaining your property and can reduce your overall tax liability. Always keep receipts and records of property tax payments to ensure you’re fully deducting these costs during tax season.
Depreciation
Depreciation is a tax deduction that allows you to recover the cost of your rental property over time. Even if the property is vacant, you can still depreciate the value of the building and its improvements. It reduces your taxable income by spreading out the cost of the property over several years. Make sure to calculate depreciation correctly to maximize the benefit.
Repairs, Maintenance, and Cleaning
You can deduct the repairing, maintenance, and cleaning costs, even when the property is vacant. It includes expenses for fixing broken fixtures, cleaning carpets, or keeping the property in good condition while waiting for residents. These are all necessary costs to maintain your rental property, and the IRS allows you to deduct these expenses from your taxes.
Insurance Premiums
You can deduct the insurance premiums for your vacant rental property. This includes homeowner’s insurance, liability insurance, and other related coverage. Even when the property is empty, it’s essential to keep the property insured. Insurance helps protect your property from damage or loss, and these premiums are deductible come tax time.
Professional Services
Professional services, such as property management or legal services, are deductible even for vacant rental properties. If you hire someone to help manage the property, advertise it, or ensure it’s legally compliant, these costs can be claimed as business expenses. AmeriHome can help you with that. Our financial management services track of all services rendered ensures you’re claiming every possible deduction for your vacant property.
Advertising
Advertising costs for finding renters for your vacant rental property are deductible. It includes expenses for online ads, newspaper listings, and any other promotional materials. Even if the property is vacant, the effort to rent it out is necessary for your business, and the IRS allows you to deduct these expenses as part of your rental property operations.
Supplies
Supplies such as cleaning products, tools, and other materials used to maintain your vacant rental property are deductible. These supplies help keep the property in good shape and ready to rent. The IRS allows these expenses to be written off when filing taxes, so keep receipts for all items you purchase for the property.
Utilities
Utility costs for your vacant rental property are deductible if you continue to pay them during the vacancy. It includes electricity, water, gas, and other utility services. Deducting these utility costs helps reduce your taxable income, even when the property is empty. Make sure to keep track of utility payments made during the vacancy.
Office Space
If you use part of your home or another space to manage your vacant rental property, you can deduct office expenses. It includes costs related to a home office, such as office supplies, phone bills, and internet. The IRS allows these deductions if the space is used exclusively for managing your rental business, even during vacancy periods.
Travel
Travel expenses related to managing your vacant rental property can be deducted. It includes trips to inspect the property, meet with contractors, or manage other tasks. If you’re traveling to maintain or prepare the property for residents, you can deduct the costs of transportation, lodging, and meals. Keep track of all travel-related expenses for tax deductions.
Non-Deductible Expenses for a Vacant Rental Property
While you can deduct many expenses related to a vacant rental property, some costs are not deductible. It’s important to know which expenses you cannot write off on your taxes.
a. Lost Rent During Vacancies: You can’t deduct the rent you lost because your property was vacant. If no one is renting, that’s a loss of income, but it doesn’t count as a deductible expense.
b. Improvements: Making significant changes, like adding a new room or renovating the property, you can’t deduct those costs. These are capital expenses, and you must spread the deductions over time.
c. Unpaid Rent: Unpaid rent isn’t deductible. If a renter doesn’t pay, you can’t write that off on your taxes. The IRS doesn’t let you claim unpaid rent as a business expense.
d. Commuting Expenses: Commuting costs to your rental property are not deductible. The IRS treats travel from your home to the property as personal expenses. These expenses cannot be deducted as part of your business costs.
e. Points or Origination Fees: Points or origination fees paid for a mortgage loan are not deductible in the year you pay them. These must be spread out and deducted gradually over the life of the loan.
Best Practices for Maximizing Deductions
To ensure you maximize your deductions and stay compliant with IRS regulations, follow these best practices:
- Ensure the property is continuously advertised for rent and document your marketing efforts. This proves that you are making an active attempt to find renters.
- Keep detailed financial records, including invoices, bank statements, and contracts related to property expenses. If audited, these records will support your deductions.
- If you own multiple properties or use part of the property for personal purposes, keep finances separate to avoid confusion when filing taxes.
- Tax laws can be complex, and working with a professional ensures you claim all allowable deductions while avoiding potential IRS issues.
Conclusion
Understanding tax deductions for vacant rental properties can feel overwhelming. The many rules and exceptions can leave you unsure of what counts as a valid deduction. Without proper guidance, you might end up making mistakes that could cost you.
That’s where our rental property financial management service in Michigan makes a difference. We can help you handle the complexities of tax deductions and ensure you’re not leaving money on the table. Let us take the stress out of managing your property’s finances.
Frequently Asked Questions
Can I deduct cleaning costs for a vacant rental property?
Yes, the costs to prepare the property for new renters are deductible, including deep cleaning, carpet cleaning, or any other cleaning necessary.
Are legal fees for eviction deductible on a vacant rental property?
Yes, fees related to eviction or other property-related legal matters are deductible, even if the property is vacant.
Can I deduct the cost of landscaping for a vacant rental property?
Yes, landscaping costs like mowing the lawn or trimming bushes are deductible as part of maintaining the property while it is vacant.
