Renting out a second home can provide a variety of benefits for homeowners in the position to do so. However, there are also a variety of things to consider when you’re renting out your second space. When homeowners decide to make this change, many wonder what qualifies as a deduction when the property is vacant, including the time before it was an income property and in the future when (and if) there’s a lapse in tenants.
For a detailed look at all the ins and outs of rental properties, view our complete rental property tax guide here:
- Tax Forms For Reporting Rental Activity
- Best Entity For Rental Property Ownership
- Selling & Reporting Your Rental
- Taxable Vacation Home Rental Income
- How To Deduct Startup Expenses
- Home Office Deductions
- Personal Car & Public Transport Travel Expenses
- Depreciation Expenses
- Tax Deductible Rental Loss
- Non-deductible Expenses
- Tax Credits For Landlords
- LLCs For Real Estate Investments
To start with, yes, you can still deduct rental expenses when the home is unoccupied. There’s a small window of time where you’re able to deduct expenses. It’s important to know as the tax code can become complicated.
Allowed Rental Home Deductions
If the house is not being rented, there are still many deductions available. Maintenance and repairs are deductible. Additionally, marketing expenses for the rental are deductible as well.
Marketing costs include any expenses associated with renting out the home. This includes hiring a real estate company to manage the property even if there’s no tenant yet. Depreciation (i.e. the reduction of your home’s value over time) is also a deductible expense, no matter how much you’re making from the home at any given time.
How Long Can You Deduct Expenses from a Vacant Property?
If you have not received income from the property for some time, that doesn’t mean you need to stop deducting expenses from your tax filings. However, that doesn’t mean you’ll always be able to do so; there are a few instances where you’ll need to stop. One of the most prominent of these is if you start using the property as a holiday home during the year. The marketing expenses cannot be deducted during this time.
Rule of Thumb: If it’s Vacant, it’s Fair Game
A good rule of thumb to follow is: if the home is not occupied, you can deduct it. This means even if you have a relative staying at the place (rent-free), you cannot deduct that time. You can only deduct expenses from the rental property for any period of time when the home is 100% vacant. For another example, if you live on the premises between January and March, you will not be able to claim any deductions during that period. However on April 1, you can go right back to deducting as you normally would.
Should you live in the property for a certain portion of the year and have it available for rent for the rest, then you’ll need to divide the potential deductions accordingly. In the example above, for instance, you could be living in the home for 25% of the year. This means you’re able to claim 75% of the rental deductions that would have otherwise been available.
This is what’s known as ‘personal time’ in the property and can be broken up into any time during the year and may have to be planned in advance for tax purposes. It should also be noted that, should this personal time be canceled for any reason, then you’ll need to put it up for rent immediately to begin claiming the deductions.
Frequently Asked Questions
Can you write off rental property expenses?
Yes, and we go into more detail here, but you can deduct rental expenses, operating expenses, and repairs.
Is vacancy loss an expense?
No. If your income property was vacant (or rented for a limited time) and spent the rest of the year vacant, you cannot deduct the vacancy as a loss of income. Typically, you are able to deduct the necessary expenses to maintain the property, including depreciation.
Can you depreciate rental property that is not rented?
Yes, if the property is available to be rented, then improvements you make, appliances with limited shelf life, and some marketing materials (such as ‘For Rent’ sign that may need to be replaced) are depreciable.
For more information, you can always contact a qualified CPA.