Rental property vacant for full year while under rehab - do I enter taxes, insurance, etc. as expenses?

[mst98]

I own a home that was continuously rented from 2006 to February 2024. Upon being vacated, the home underwent massive mold remediation. This snowballed into a much larger project, and as a result, the home was vacant for all of 2025, and is still undergoing very slow renovations which include both repairs and improvements. The rental registration fee was paid to the city for 2024, 2025, and 2026 since we planned to keep it as a rental. It will not be sold, but now the possibility exists for it to be converted to personal use in 2026. 

Should the property taxes, insurance premiums, repairs, and utilities be entered on the 2025 return as expenses for this property since it was being maintained as a rental for the year? Is my understanding correct in that the improvements should not be entered for 2025 since the property was not available for rent during that time? 

I understand that any loss of rental income for 2025 is not deductible. 

I also entered an improvement during 2024, which started depreciation on that improvement. I am now questioning whether I should have entered it for 2024 since the home remained vacant after the improvement date.

My questions stem not from a concern about my current tax liability, but rather from ensuring that I correctly enter the information to avoid any negative consequences in the future. Any guidance would be most appreciated.

Thank you. 

[DianeW777]

First, once the property was not available for rent, all expenses cease at that time. Any capital improvements will be added to the cost basis as a separate amount. As far as 2024 goes, if the home was available for rent at a certain point then the improvements asset was entered and used appropriately, even if the property did not have a tenant.

For 2025 maintain all capital improvements records and if there was no rental activity because it was not made available for rent, then the expenses you listed (property taxes, insurance premiums, repairs, and utilities) are not deductible on the Schedule E rental. The property taxes could be used on Schedule A if you itemize deductions.

In the rental property assets you should indicate the following:

1. Once you reach the asset section of your rental property you will select each asset and then indicate the following as the screens come
   1. Beside each Asset select to edit/update  
      1. Select  The item was sold, retired, etc...
      2. Do not enter a date of sale instead select that is was converted to personal use and enter the date.
      3. Continue to Select 'Yes' for Special Handling.

Keep all the asset records so that you do have them if and when you sell the property. The depreciation recapture will be necessary when and if that happens in the future.

[mst98]

I appreciate your response. 

Question about "As far as 2024 goes, if the home was available for rent at a certain point then the improvements asset was entered and used appropriately, even if the property did not have a tenant." 

The improvement was the addition of exterior perimeter drains, a french drain, and a sump pump to deal with standing water in the crawl space (which was what caused the mold problem in the first place.) This improvement was made after the tenants vacated, but the property did not return to a rentable condition after this date. Thus my concern about entering it as an improvement during 2024.

Additionally, the intent was always to rent it, but the renovations have been painfully slow. So I don't know what date to enter as a conversion to personal use.

Thank you again. 

[MarilynG1]

Since the improvement was made after the tenant moved out, and the property was not available for rent after that, you could Amend your 2024 return to remove the Improvement Asset.  Add this amount to your Cost Basis instead.  If you rent again in the future, use the new Cost Basis when setting up the rental.

Otherwise, track any additions to Cost Basis for whenever you sell the property.

@mst98 

[mst98]

It seems like I have more questions than I initially thought.

I understand amending the 2024 return to remove the improvement. Thank you.

Did I err in entering the property taxes, insurance, utilities, and repairs as 2024 expenses for the property since it was being maintained as a rental even after the tenants vacated? 

[DaveF1006]

No, you didn’t err. Those expenses are normally still deductible in the year they were paid as long as the property was held out for rent and not converted to personal use.

[user17761749502]

Hello,

I am in basically an identical situation with a house that was rented for years, vacated in late 2024 and under renovation for all of 2025. I am still working on the house and hoping to finish this summer.

Can you pinpoint me to where the IRS guidance says that the house needs to be converted to a personal property while undergoing renovations?

I am reading 2025 IRS Publication 527 and see the following sub-section on page 6 of the document:

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.

Additionally, page 9 has the following sub-section:

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.

These sections seem to directly contradict your advice to reclassify the rental as personal property for the duration of the renovation. Namely the Idle Property section directly states that the property should continue to be depreciated after the tenant moves out and the property isn't available for rent. 

In my case, this house is a rental, always used as a rental and I have no plans to ever use it as a personal residence. As with the original poster, my main concern is to get my taxes filed properly. Thus, if you could please point me to where the IRS directly states that the house needs to be treated as a personal residence while undergoing major renovation, that would be appreciated.

Thanks in advance for the help!

[DianeW777]

There is a key difference between you and the original question. You clearly indicate the rental property will  not be converted to personal use and you do not plan to use this rental as your personal residence at any time after renovations are complete. This assumes you do hold the property out for rent and that you market as available for rent once renovations are complete.  Temporarily vacant and temporarily idle are the key as you discovered.

The IRS is not clear on exactly how they might define 'temporary'. Renovations that take a period of 18 months (+/-) may or may not be considered temporary and you would be the one to argue that point if it ever comes about.

Based on your information and your plan to rent as soon as the renovations are complete, you can continue to enter expenses and depreciation. The statement 'you can’t deduct any loss of rental income for the period the property is vacant' may be clear but to be sure, it's saying the income lost is not a deduction, it's simply your loss.

In the software, you must indicate it was available all year for you to see the expenses and depreciation populate on the return.

@user17761749502 

[user17761749502]

Hi @DianeW777 ,

Thanks for the prompt reply! I have some follow-up questions.

The renovation work I completed in 2025 includes, for instance, some structural repairs to the framing of the house (Restoration section on page 7 of 2025 IRS Publication 527?) as well as new electrical work for new lighting (Improvement/Betterment sections on page 7 of 2025 IRS Publication 527?).  As far as I can understand these are improvements and need to be capitalized.

This work has been completed in 2025. However, as mentioned in my previous post, the overall renovation is not complete and the property is still vacant as work is ongoing.

How does the IRS define when this work had been put into service? Is it when it is completed or is it when the property is rented again? Also, do I capitalize this work on my 2025 return or do I lump it all with my 2026 costs and capitalize everything on my 2026 return?

Thanks again for your input, it is greatly appreciated! 

[DaveF1006]

Because the renovation was ongoing and the property remained vacant through the end of 2025, you generally do not start the depreciation schedule on your 2025 return. 

You cannot begin depreciating (capitalizing) these improvements until the tax year the property is actually placed back into service. 

According to IRS Publication 946, property is placed in service when it is:

1. Ready and available for a specifically assigned function.
2. In a condition or state of readiness for that function