Did not rent or try to rent - Schedule E?

[mroses]

I have a multifamily home with 3 units. I live in one unit and the other 2 are rentals that had been rented out prior to 2023. In 2023 I did not rent the units out or advertise them. I do intend to rent the units out again, but would like to do some work such as having the driveway repaved first. Can I deduct expenses on a Schedule E?

If I enter 0 rental days for the property, I'm asked, "Did you try to rent the property to others at all during 2023?" If I choose no, it says "Since you didn't try to rent the property at all in 2023, it's not considered a rental" and to not complete a Schedule E.

From what I can find, IRS Publication 527 does not mention advertising/trying to rent the property as a requirement. I found the following:

Idle Property
Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it isn’t available for rent.

Vacant rental property.

If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you can’t deduct any loss of rental income for the period the property is vacant.

[DianeW777]

This could be considered a 'Not for Profit' rental in 2023 because in your own words 'I just chose not to rent them out' and 'I did not rent the units out or advertise them.'

You also indicate you would like to repair the driveway outside before renting them again, however you haven't done that for at least a year.  Timing does make a difference, in other words the dormant or vacant period is not allowed to go on indefinitely. Temporary in tax terms will not mean a year or more for vacant or idle.

It could be considered a 'Not for Profit' rental in 2023. The information next is also from Publication 527 (page 25):

If you don’t rent your property to make a profit, you can’t deduct rental expenses in excess of the amount of your rental income. You can’t deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. 

Where to report (any rental income). Report your not-for-profit rental income on Schedule 1 (Form 1040), line 8j. If you itemize your deductions, include your mortgage interest (if you use the property as your main home or second home), real estate taxes, and casualty losses from your not-for-profit rental activity when figuring the amount you can deduct on Schedule A. 

Presumption of profit. If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit. 

I would advise to change or convert the property to personal use in 2023, (date can be 01/01/2023) and then add the property back in 2024, if you resume the rental activity after your capital improvements.

[mroses]

@DianeW777 Thank you for your response. You say that “Temporary in tax terms will not mean a year or more for vacant or idle.” It makes sense, but is there anything written in any IRS publications about the amount of time a rental can be vacant/idle?

To convert to personal use would I simply not submit a Schedule E? Does the depreciation recovery period (27.5 years) “pause” for the time that the property is taken out of service and then resume when it is placed back in service?

[DianeW777]

No, there is no distinct writing about rentals specifically. However, they do describe temporary in relationship to a job location which is what I described. The IRS will use their judgement and could site any Tax Court cases if applicable should your return be reviewed. 

• IRS Section 162 RR 99-7

Yes, you would say it was converted to personal use on a date you choose, then it would be removed and paused from your tax return for the idle period.  To resume  the assets are added back to the tax return when you make it available again and enter the depreciation previously used when asked as you enter the assets back to your tax return that year.  The assets will be entered exactly as they were before  but with a new date placed in service and the prior depreciation entry. 

@mroses