Yes – you can deduct rental property expenses even if you have zero rental income, but only under certain conditions defined by the IRS. In other words, a landlord may write off expenses on a vacant property if the property is genuinely held for rental use and meets strict IRS guidelines.
If those conditions aren’t met (for example, if the property is used personally or not truly available for rent), then you cannot claim those rental deductions. Below, we break down the detailed rules, exceptions, and real-world examples to help you understand when a rental expense deduction with no rental income is allowed and when it isn’t.
IRS Rules for Vacant Rentals (Publication 527 Guidance)
The IRS does allow deductions on a rental property that has no tenants, as long as the property is held out for rental purposes. According to IRS guidelines in Publication 527 (Residential Rental Property), you may deduct ordinary and necessary expenses to manage and maintain a rental property even while it’s vacant, provided the property is ready and available for rent.
This includes expenses like utilities, maintenance, insurance, property taxes, and even depreciation on the building. The key is that the property must be in a rental status – meaning you are actively trying to rent it or it’s available for rent – during the period of vacancy.
Example: Suppose you had a rental house that sat empty for six months last year. You were actively listing it for rent and making the property available to prospective tenants. During those six months, you still paid mortgage interest, property taxes, insurance, and did lawn care. The IRS lets you deduct those expenses on Schedule E just as if the property were rented, because the property was held for the production of rental income. In essence, the tax law recognizes that a rental business can have a temporary lull with no revenue, yet still incur expenses.
What You Cannot Deduct: While you can deduct actual expenses of managing a vacant rental, you cannot deduct “lost” rental income for the time the property was empty. For instance, if you normally charge $1,500/month in rent but had no tenant for six months, you might feel like you “lost” $9,000 in rent – however, the tax code does not allow you to claim a $9,000 loss for those missed rents. You can only deduct actual expenses you paid out for the property.
In short, missed rental income is not a deductible expense (for cash-basis taxpayers). The IRS makes an exception only in rare cases for accrual-basis taxpayers via a bad debt deduction, but for most landlords this won’t apply. Focus on deducting your out-of-pocket costs, not any hypothetical income you didn’t receive.
Property Must Be Available for Rent: An important condition is that the property is truly available for rental use. If you hold the property out for rent, such as by advertising or listing it with an agent, and you do not use it personally, it’s considered in “rental use” even if it’s vacant. In contrast, if you simply have an empty house that you aren’t actively trying to rent (perhaps waiting for market conditions to improve), the IRS might not consider it a rental property for that period.
Being passive or indecisive can cost you – you generally cannot deduct expenses if you make no effort to rent the property, because then it’s not “held for income production.” The tax rules require a clear profit motive and actual attempts to secure tenants.
Placed-in-Service Date: If you’re dealing with a newly converted or purchased rental, note that expenses are deductible only after the property is “placed in service.” “Placed in service” means the property is ready and available to rent. For example, if you bought a fixer-upper in January and spent three months renovating it before listing for rent on April 1, the rental activity begins on April 1. Expenses incurred before that date (like upfront repairs or improvements while getting the place ready) are generally not immediately deductible rental expenses.
Some pre-rental costs can be capitalized (added to the property’s basis or treated as start-up costs), but you cannot deduct maintenance, utilities, or depreciation for periods when the property wasn’t yet available for rent. Make sure you start your deductions in the proper timeframe – once the property is in rental condition and actively marketed to tenants.
Rental Use vs. Personal Use: Why It Matters
Whether a property is classified as rental property or personal-use property is a crucial distinction for tax purposes. Rental use means you’re holding the property to generate rental income (even if you currently have none). Personal use means you or your family use the property for your own enjoyment or benefit. The IRS uses this distinction to determine what expenses are deductible and to what extent. Here’s how the lines are drawn:
- Exclusively Rental Use: If a property is used 100% for rental (and not at all for personal days), you can deduct all ordinary and necessary rental expenses, even in a year with no rental income. The expenses will go on Schedule E and can result in a net loss (which may be limited by other rules, discussed later). The critical factor is that you had no personal use of the property and it was either rented or available for rent.
- Mixed Use (Rental and Personal): Many vacation homes and second houses fall into this category. If you split use of the property between renting it out and using it yourself, the tax law requires allocating expenses between rental and personal use. You can only deduct the portion related to rental use. Furthermore, if your personal use is significant, additional limitations kick in: you cannot deduct rental expenses beyond the amount of rental income if the property is considered a “residence” under IRS rules.
- In general, if you personally use the home more than 14 days in the year or more than 10% of the total days it was rented to others (whichever is greater), the property is treated as a personal residence for tax purposes. In that scenario, rental deductions are capped at rental income – you cannot create a rental loss to offset other income. Essentially, the property becomes subject to the vacation home rules (IRC Section 280A): you must prorate expenses, and any excess expense over rental income is not currently deductible (though mortgage interest and property taxes might be deductible as personal itemized deductions instead).
- Minimal Rental Use (the 14-Day Rule): What if you rent out your home only a very short time? The tax code says if you rent out a dwelling for fewer than 15 days in a year, you do not have to report the income (it’s tax-free), but then none of the rental expenses are deductible either (except that you can still deduct property tax and mortgage interest as a personal residence, within normal limits).
- So, a property with extremely minimal rental activity is essentially treated like it was purely personal-use. For example, if you rent out your vacation cottage for one week during a local event and use it yourself the rest of the year, you need not report that rent, but you also can’t deduct cleaning fees or other rental expenses for that week. This special rule prevents people from taking large deductions on what is basically their personal home by renting it out briefly.
- Converted to Personal Use Mid-Year: If your property started the year as a rental and later you decided to convert it to personal use, you must split the expenses for the year between the rental period and the personal period. Expenses attributable to the time after conversion (when you stopped holding it out for rent and began using it personally) are generally not deductible as rental expenses.
- For instance, say you rented your house from January through June, then took it off the market and moved in yourself in July. You can deduct expenses (utilities, insurance, etc.) up to June, and depreciation up to the conversion date. After you convert it to personal use, those costs become personal living expenses (non-deductible, except possibly mortgage interest and property tax under the personal itemized rules). You cannot deduct a full year’s worth of rental expenses if the property was not a rental for the full year. Only the portion when it was an actual or available rental is deductible.
In summary, to deduct expenses with no rental income, the property must be in genuine rental use (or available for such use) and not crossed over into personal-use territory. Crossing that line triggers limitations that generally prevent any net rental loss deduction. Always be mindful of the 14-day / 10% rule and track personal use days. If you use the property yourself beyond the allowed threshold, the IRS will not permit a deductible loss — at best, you break even for tax purposes between rental income and allocated expenses.
Profit Motive and the “Not-for-Profit” Rental Trap
Even if a property is technically a rental (i.e. not used personally), you still need a bona fide profit motive to deduct losses. The IRS does not want taxpayers claiming deductions for activities that are really personal indulgences or that lack a true intention to make money.
If you continuously show losses and never any income or profit from your rental venture, the IRS could classify it as “not engaged in for profit” (essentially a hobby or personal activity). Under IRS code Section 183 (the hobby loss rule), expenses from an activity not engaged in for profit are deductible only up to the amount of income from that activity – meaning you cannot deduct a net loss at all in such cases.
For rental properties, profit motive is usually presumed if you’re making a genuine effort to rent at a fair price and you have a reasonable expectation of eventual profit (either from rental income or future resale appreciation). Real estate investments often have a few loss years due to depreciation and start-up costs, so the IRS gives some leeway.
However, if you have many years in a row of losses with little or no rental income, it raises a red flag. The IRS might ask you to prove that you weren’t just holding the property for personal reasons or hoping for a speculative gain without trying to earn rental income.
Tax Court Rulings: Over the years, courts have weighed in on what constitutes a true profit motive for landlords with ongoing losses. In Thomas v. Commissioner, a notable tax court case, the court emphasized that a taxpayer must demonstrate an actual and honest objective of making a profit from the property.
In that case (and others like it), deductions were denied because the owners couldn’t substantiate a genuine profit-oriented effort – they treated the property more like a personal asset or investment toy, rather than a business. The courts have pointed out factors such as lack of serious rental activity, inadequate advertising, using the property for personal pleasure, or unrealistic pricing as indications that there was no true profit motive.
How to Demonstrate Profit Intent: To protect your deductions, run your rental property in a businesslike manner. Set a viable rental rate, list the property for rent widely, keep records of inquiries, maintain the property, and document all efforts to rent it. If you’ve had several loss years, it helps to show you’ve made changes to try to improve profitability (for example, adjusted the rent, upgraded the property to attract tenants, or cut costs).
Remember, the tax law doesn’t require you to actually make a profit every year, but it does require that you honestly intend to make one and are taking steps toward that goal. If your property has never been rented and year after year you deduct expenses, expect the IRS to question whether this is a for-profit activity. A few profitable years (or at least occasional positive income) can go a long way to substantiate your position that this is a legitimate rental business and not just a deductible hobby.
Passive Loss Limitations and Carryovers (IRC Section 469)
Even when you’re allowed to deduct expenses and end up with a net rental loss, you may not get to use that loss on your tax return right away. This is due to the passive activity loss rules set forth in IRC Section 469. Rental real estate is generally categorized as a passive activity for tax purposes (unless you qualify as a real estate professional or meet certain exceptions). Passive activity losses can only offset passive activity income, with one big exception for moderate-income landlords.
Here’s how this plays out when you have no rental income:
- Passive Losses Need Passive Income: If your rental property incurs a loss (expenses exceeding any rent), that loss is considered a “passive loss.” In a year with no rental income, you have a passive loss but no passive income from that property. Unless you have other passive income (perhaps from another rental or another passive investment like a limited partnership), you generally can’t use the loss to offset your wages, interest, or other non-passive income in the current year. The loss doesn’t disappear, though – it becomes a suspended passive loss to carry forward.
- $25,000 Special Allowance: There is a favorable exception for many landlords: if you “actively participate” in the rental (a fairly easy standard met by most small landlords who make management decisions), you can deduct up to $25,000 of rental loss against your other income in a year, provided your adjusted gross income (AGI) isn’t too high. This is often called the rental real estate loss allowance. It allows a single or married filing joint taxpayer with AGI up to $100,000 to claim up to $25k of loss.
- The allowance phases out between $100,000 and $150,000 of AGI (completely gone at AGI $150k+). If you have no rental income, this provision can let you still benefit from the loss by reducing your other taxable income – but only if you qualify (i.e. you actively participated in the rental decisions and your income is under the limit). Active participation simply means you were involved in management decisions like approving tenants, setting rents, arranging for repairs, etc., even if you hired a property manager for the day-to-day work.
- Carryforward of Losses: Any rental loss that you cannot use due to the passive loss rules isn’t lost forever. It gets carried forward to future years. You keep a running tally of suspended passive losses for each rental activity. In a future year, if you have positive rental income, you can use the carried-forward losses to offset that income. Ultimately, if you sell the rental property, all the suspended losses for that property are released and can be deducted in full in the year of sale (against any type of income) – assuming you sell in a taxable transaction.
- For example, imagine you had a $5,000 loss each year for three years with no rental income to use it, creating a $15,000 carryforward. In year 4, you finally get a tenant and have $10,000 of net rental income; you could use the carryforward to offset that entirely. Or if you sell the property in year 4, you can deduct the entire $15,000 of past losses on that year’s return. Tip: Even if a loss is suspended by passive rules, it’s still valuable – make sure to file your Schedule E and track those losses, so you can benefit later.
- Real Estate Professionals: A brief note – if you happen to qualify as a real estate professional under tax law (meaning you spend the bulk of your working hours and at least 750 hours a year materially participating in real estate trades or businesses), then your rental losses might not be passive at all, allowing you to use them without the passive limitation. This scenario is less common and typically applies to full-time real estate investors/agents. For most casual landlords with a day job, the passive loss limits will apply.
In essence, having no rental income means your rental loss likely falls under the passive loss restrictions. You can take advantage of the special $25k allowance if eligible, which lets many average landlords deduct their rental losses immediately. If you’re not eligible or the losses exceed that allowance, don’t worry – the losses carry forward. They aren’t wasted; they’re just postponed. Always file those losses on your tax return even if they’re suspended, so you have the paper trail to use them in the future.
How Long Can a Property Be Vacant and Still Generate Deductions?
A common concern for landlords is how long a rental property can remain empty before the IRS disallows expense deductions. There is no specific time limit in the tax code for vacancy, as long as you continue to hold the property for rental and are trying to rent it. In theory, a rental could be vacant for an entire tax year (or even multiple years in a tough market) and you could still deduct expenses each year if you can demonstrate continuous intent to rent. However, the longer a property remains unrented, the more scrutiny it may draw.
Continuous Effort: The key to a long vacancy is showing that you never stopped treating it as a rental. Keep documentation of your efforts during the vacancy. This could include listings on rental websites, ads in newspapers, records of hiring property managers or leasing agents, receipts for ongoing maintenance to keep the property rentable, and logs of inquiries or showings.
If year after year passes with no tenant, you may be asked to prove that you weren’t just holding out for an unrealistic rent or letting the house sit idle. Adjust your strategy if needed – for example, consider lowering the rent or making improvements – so that you can eventually secure tenants. A pattern of perpetual vacancy without corrective action could suggest a lack of profit motive (as discussed earlier).
Temporary Withdrawals vs. Permanent: It’s possible you might take a property off the rental market temporarily – perhaps for renovations or because you’re undecided about selling. If you temporarily stop advertising but intend to resume rental, you should document that this is a short-term pause. Generally, if the property is not available for rent at all for a certain period, expenses in that period might not be deductible. For instance, say after a tenant left you took the property off-market for six months to do major remodeling with the plan to attract higher rent later. Expenses during that improvement phase (utilities, maintenance) could potentially still be considered part of getting the property back in service, but this is a gray area.
Often, substantial renovation costs should be capitalized into the property’s basis (as improvements). Routine expenses while remodeling (insurance, property tax, interest) typically remain deductible, but make sure the property wasn’t converted to personal use during that time (you shouldn’t be living there yourself, for example). If asked, you’d want to show that the downtime was part of the rental operation’s plan, not a personal interlude.
Multiple Years with No Income: There is also an economic reality check. If a property produces no income for several consecutive years, at some point the question arises: is this a viable rental, or should it be reclassified (or sold)? While not a formal rule, some tax professionals suggest that if you haven’t had any revenue in, say, 3-5 years, you risk the IRS arguing it’s not really a for-profit rental activity. To counter that, be ready to justify the reasons (e.g., you had to rebuild after a natural disaster, or local rental markets collapsed but you’re holding on for recovery, etc.). Each situation is unique. There have been cases where landlords sustained extended vacancies due to market conditions or property issues and still retained their deductions because they demonstrated diligence and eventual turnaround. The bottom line: there’s no hard deadline, but long vacancies put more onus on you to prove your intent and effort to rent.
Abandonment and Selling: Special Situations for Deductions
What happens if you decide you no longer want to be a landlord? Two common scenarios are abandoning the rental business (converting or leaving the property idle) or selling the property. Each has different tax implications for your deductions:
- Property Listed for Sale: If you choose to sell a rental property that is currently vacant, you might wonder if you can deduct expenses while it’s up for sale. According to IRS guidance, you can continue to deduct carrying costs while the property is listed for sale only if the property is still held out for rent during that time. In practice, this means if you list the house for sale and you’re still open to renting it (for example, you’re doing both – trying to either sell or rent, whichever comes first), you can keep treating it as a rental and deduct expenses until it sells.
- However, if you’ve taken it off the rental market entirely and are solely focused on selling, then the property is no longer a rental as of the date you stopped trying to rent. From that point on, expenses are not rental deductions. Instead, some of those costs might be considered selling expenses that effectively reduce your taxable gain on the sale (things like maintenance or utilities while selling can arguably be added to the cost of selling the property). Be careful here: once you decide the property is no longer for rent, you should stop taking Schedule E deductions.
- Converting to Personal Use or Second Home: Maybe you don’t sell, but you decide to keep the property for yourself – as a second home, or for a relative to live in, etc. In that case, the same rule as earlier applies: once it’s no longer a rental (as of the conversion date), you cannot deduct rental operating expenses going forward. The property’s status changes to personal-use, and only personal deductions (like mortgage interest or property tax, within limits) apply.
- You also stop depreciating the property from that point, since depreciation is only for property used in business or income production. If you convert it back to a rental in the future, you would resume depreciation where you left off. Keep records of the conversion dates and values, because if a property’s use flips, you’ll need those for taxes (for example, the basis for depreciation or potential gain calculations might be affected by personal use periods).
- Abandonment or Demolition: In rare cases, an owner might effectively abandon a property – e.g., the building is uninhabitable or not worth fixing, and you walk away or tear it down. Abandonment in a tax sense means permanently retiring the asset from use without selling it. Generally, if you abandon business or investment property, you can take a loss deduction equal to the property’s remaining adjusted basis (what you paid minus depreciation taken).
- For real estate, abandonment is tricky because usually land is still there (land itself can’t be abandoned for a loss since it doesn’t become worthless). If you demolish a building, the IRS actually doesn’t allow an immediate loss; instead, any remaining building basis gets added to the land’s basis.
- So, for rental real estate, abandonment losses are not commonly claimed unless the property truly became worthless. Most often, if a rental venture ends, you either sell the property or convert it to personal use. But it’s good to know that if your property literally became unusable and you abandoned it, there could be a deduction for the remaining value. Always consult a tax advisor in such an extreme scenario, as rules can be complex on proving abandonment.
In summary, once you stop being a landlord (whether by selling or converting the property), your ability to deduct ongoing rental expenses ends. Plan the timing carefully – for instance, if you’re going to sell but still have significant deductible expenses, it might be worth keeping the property available for rent a bit longer. Conversely, if you’ve stopped trying to rent, do the right thing and cease claiming rental deductions, because the IRS will expect to see that rental income was no longer intended or sought.
50-State Comparison: Rental Expense Deductions Across the U.S.
Rental property taxation isn’t just a federal matter – each state can have its own twist on allowing rental expense deductions, especially when losses are involved. In general, state income tax laws tend to follow the federal rules for determining taxable rental income and losses, but there are some nuanced differences. Below is an overview of all 50 states, focusing on whether they conform to federal treatment of rental losses (deducting expenses with no income) and any unique state-level rules. This covers residential, commercial, and mixed-use rental properties, as states typically apply the same income tax principles regardless of the property type:
| State | State Rental Deduction Rules & Nuances |
|---|---|
| Alabama | Follows federal rental income and expense rules (allows rental loss deductions and passive loss carryforwards in line with IRS rules). No special state-level limitations beyond federal passive loss rules. |
| Alaska | No state income tax. Alaska does not tax personal income, so there’s no state tax filing for rental income or loss. (Federal rules apply for federal taxes, but at the state level this is not applicable.) |
| Arizona | Conforms to federal rules on rental deductions. Rental losses can be deducted for state purposes as allowed federally (subject to passive loss limits). Arizona generally uses federal adjusted gross income as the starting point, so federal passive loss limitations and carryovers apply. |
| Arkansas | Follows federal treatment of rental income and expenses. Allows rental expense deductions and passive loss carryforwards similar to IRS rules. No significant deviations specific to rental property losses. |
| California | Largely conforms to federal rental loss rules (including passive loss limitations and the $25k allowance). No state income tax break for purely personal rental losses – you must follow the federal determination. Note: California does decouple from federal bonus depreciation and certain expensing rules, which means the amount of depreciation you can deduct each year may differ from your federal amount. This can affect the size of your rental loss for California purposes (usually California requires slower depreciation, potentially yielding smaller losses or income). California taxpayers should use state-depreciation schedules but still carry forward any disallowed passive losses to future years, just like federal. |
| Colorado | Conforms to federal tax law on rental losses. Colorado starts with federal taxable income, so any rental loss limitations at the federal level carry over to the state return. Colorado does require add-back of federal bonus depreciation, meaning rental depreciation might be lower in the state calculation, but passive loss rules still apply in the same manner. |
| Connecticut | Follows federal rules for rental deductions and losses. CT uses federal AGI as a baseline. No special restriction on rental losses beyond the federal passive activity rules. Any passive losses not used federally will likewise not be used in Connecticut until allowed federally (Connecticut generally doesn’t have separate passive loss calculations). |
| Delaware | Conforms to federal treatment of rental income and expenses. Delaware allows rental expense deductions as on the federal return. Passive losses are subject to the same limitations and are carried forward for Delaware if unused (Delaware starts with federal AGI). |
| Florida | No state income tax. Florida does not impose personal income tax, so there is no state-level deduction or taxation of rental income/loss. Federal rules apply for federal tax only. |
| Georgia | Follows federal rules for rental income and loss deductions. Georgia uses federal AGI and generally respects passive loss limitations. Like many states, Georgia does not allow federal bonus depreciation – it requires its own depreciation calculation – so state net rental income/loss may differ in amount, but any loss disallowed federally will also be disallowed in GA. Georgia typically requires taxpayers to keep track of state-specific depreciation and passive loss carryforwards separately if they differ from federal due to those depreciation adjustments. |
| Hawaii | Conforms closely to federal tax law for personal income. Hawaii allows rental expense deductions and uses passive loss rules similar to federal. There are no unique Hawaii-only limitations on rental losses (but Hawaii, like federal, will only let you use them when passive income is available or under the $25k exception). Note: Hawaii has its own state depreciation schedules conforming to federal MACRS as of a certain date, so check for any decoupling if federal law changes, but generally it aligns. |
| Idaho | Follows federal rental deduction rules. Idaho starts with federal taxable income, so rental losses and their limitations carry through. Idaho does have some state adjustments (for example, Idaho has required add-back of bonus depreciation in the past), but aside from timing differences, the allowance of rental loss deductions is the same as federal. |
| Illinois | Conforms to federal treatment of rental expenses and losses. Illinois uses federal AGI for state tax, meaning if a rental loss is allowed or disallowed federally, it is treated the same in Illinois. However, Illinois is known to decouple from federal bonus depreciation and certain accelerated depreciation: taxpayers must make adjustments to add back bonus depreciation and then subtract it out over subsequent years. This can lead to different rental income calculations in a given year, but Illinois still follows the federal passive loss framework. In practice, you may need to track passive losses separately for Illinois if depreciation differences cause a variance in what’s allowed each year. |
| Indiana | Follows federal rental income and loss rules. Indiana’s tax calculation begins with federal adjusted gross income, so any rental losses reported federally (or suspended) flow into Indiana the same way. Indiana does decouple from some federal provisions like bonus depreciation, requiring addbacks, but overall does not impose extra restrictions on deducting rental losses beyond federal rules. |
| Iowa | Conforms to federal rules on rental deductions and passive losses. Iowa generally adopts the Internal Revenue Code (with updates) for determining income. Rental losses are handled in line with federal law, including carryforwards of disallowed losses. Iowa may decouple from some depreciation rules (Iowa historically conformed to federal bonus depreciation for individuals in some years but not others), so minor differences in depreciation expense can occur. |
| Kansas | Follows federal treatment of rental income and expenses. Kansas uses federal AGI as the starting point, so rental losses and limitations from the federal return apply. Kansas has conformed to federal passive loss rules; any disallowed loss will carry forward at the state level similarly. Kansas often decouples from bonus depreciation, requiring adjustments, but that affects timing, not the fundamental ability to deduct losses eventually. |
| Kentucky | Conforms to federal rental loss rules. Kentucky starts with federal AGI for its income tax, so it honors the federal passive activity loss limitations and $25k offset rules. Kentucky does have some differences in depreciation (it limits Section 179 expensing to a lower amount than federal in some years and disallows bonus depreciation), which can alter the year-by-year rental profit/loss calculation. Nonetheless, Kentucky allows rental losses to be deducted or carried forward consistent with federal outcomes. |
| Louisiana | Follows federal rules for rental deductions and passive losses. Louisiana taxable income is based on federal taxable income, so rental losses are treated as on the federal return. If a loss is suspended federally, it will be suspended in LA; if allowed (e.g., under the $25k exception), LA allows it. Louisiana, like many states, requires adjustments for bonus depreciation differences but does not have an independent passive loss regime. |
| Maine | Conforms to federal rental income deduction rules. Maine uses federal AGI as the starting point for state income tax, meaning it accepts federal rental loss calculations. Maine does decouple from bonus depreciation (adding it back and then a subtraction in later years), so year-by-year losses might differ in amount but not in concept. There are no additional Maine-specific limits on using rental losses beyond what federal law imposes. |
| Maryland | Follows federal treatment of rental expenses and losses. Maryland uses federal adjusted gross income to compute state taxable income. Therefore, any rental loss deducted federally will reduce Maryland income equally, and any passive loss limitations carry over. Maryland conforms to federal passive loss rules entirely. (Maryland also decouples from certain federal depreciation like bonus depreciation via an addback mechanism, but this is a timing issue, not a disallowance of the deduction.) |
| Massachusetts | Partially different approach: Massachusetts taxes rental income but does not fully incorporate federal passive loss rules in the same way. MA has its own category for rental/royalty income on Schedule E of the MA return. Generally, you can deduct rental expenses against rental income in Massachusetts, but Massachusetts does not allow a net rental loss to offset other types of income. If your rental expenses exceed rental income, Massachusetts will typically limit the loss to zero for state tax purposes (you can’t use it against wages or other income). Unused rental losses in MA may carry forward to offset future rental income from the same property (Massachusetts instructs taxpayers to keep track of disallowed losses to use against future profits on that property). MA also requires its own passive loss calculations if you have multi-state activities – essentially you calculate how much of the federal-allowed passive loss applies to MA sources. In summary, you can deduct rental expenses up to rental income in MA, but you cannot create a state tax loss from rental activities to reduce other income. Any excess is suspended to future years, but only usable against that category. |
| Michigan | Follows federal rules for rental losses. Michigan uses federal AGI. Thus, if you have a rental loss that was deductible on your federal return (or carried forward), the same will apply to Michigan. Michigan generally conforms to federal income definitions; it does require addback of bonus depreciation and then provides a deduction in later years to mimic the federal depreciation over time. That said, Michigan does not impose extra limits on passive losses – they flow through from federal treatment. |
| Minnesota | Conforms to federal passive loss rules and rental deductions. Minnesota starts with federal taxable income and then makes certain additions/subtractions. Minnesota often decouples from some federal provisions (like Section 179 limits or bonus depreciation), which can cause state-specific adjustments in the timing of deductions. But Minnesota does not disallow rental losses beyond those federal adjustments. As with others, if a loss is suspended federally, it will be suspended in MN. If federal allowed $25k of loss, MN will usually allow it as well (with slight modifications if necessary to account for depreciation differences). |
| Mississippi | Follows federal rental income inclusion and deduction rules. Mississippi doesn’t have unusual passive loss restrictions separate from federal law. MS taxable income starts from federal taxable income, so rental losses are reflected accordingly. (Mississippi has its own depreciation rules to some extent – it often decouples from bonus depreciation as well – but aside from that, no unique bar on deducting rental expenses.) |
| Missouri | Conforms to federal rules on rental deductions. Missouri uses federal AGI as a base and generally mirrors federal passive loss allowances. Like other states, Missouri adds back bonus depreciation and then subtracts it out over years, affecting the yearly net income calculation but not introducing new loss disallowances beyond federal. Rental losses not usable federally will carry in Missouri too until allowed. |
| Montana | Follows federal treatment of rental income and losses. Montana typically conforms to the federal definition of income (it’s a rolling conformity state). Rental losses are handled with the same passive activity limitations and allowances. Montana taxpayers can deduct rental expenses and losses just as on the federal return; if losses are carried forward federally, they do the same for MT. No extra state hurdles specific to rental losses. |
| Nebraska | Conforms to federal rental loss rules. Nebraska’s state income tax starts with federal AGI, so any rental deductions and passive loss carryforwards are recognized similarly. Nebraska requires adjustments for bonus depreciation differences (like adding back a percentage of bonus), but that does not fundamentally change whether a loss is allowed, only the timing. Otherwise, NE allows rental losses per federal outcome. |
| Nevada | No state income tax. Nevada has no personal income tax, hence no state-level treatment of rental income or deductions. All tax considerations are at the federal level only for NV residents (though if you own property in another state, you’d deal with that state’s rules). |
| New Hampshire | No broad personal income tax. New Hampshire does not tax wage or business income for individuals; it only taxes interest and dividends. Rental income for individual owners is generally not subject to NH tax, so there’s no mechanism for deducting rental losses on a state return. (If rental is operated through a business entity, NH’s Business Profits Tax might apply in some cases, but for a typical individual landlord, NH has no income tax filing requirement on rental activity.) |
| New Jersey | Does not allow net rental losses to offset other income. New Jersey’s tax code treats income in separate categories and does not permit a loss in one category to reduce income in another. Rental income and expenses are reported on NJ Schedule NJ-BUS-1. You can deduct rental expenses up to the amount of rental income, but if expenses exceed income, New Jersey will not allow the excess loss on the current return. Also, NJ does not allow passive loss carryforwards like federal. Essentially, any rental loss beyond income is unused and does not carry over year to year for NJ purposes. (One small caveat: if you have multiple rentals, NJ typically requires each property to be listed, and you might be able to offset one property’s income with another’s loss within the same year, but you cannot have an overall net loss.) So in NJ, if you had no rental income, none of your rental expenses would be currently deductible on the state return – they are lost for state tax (though still deductible federally). |
| New Mexico | Follows federal rules on rental deductions. New Mexico uses federal income as a starting point for its calculations. Rental losses are allowed or disallowed in NM exactly as they are federally. NM has conformed to federal passive activity rules; any federal carryforward of a loss will be tracked similarly in New Mexico. No special NM-only limitations on rental losses exist beyond normal adjustments (like NM decoupling from some depreciation methods if they do). |
| New York | Generally conforms to federal rental income and loss rules, with some depreciation adjustments. New York starts with federal AGI and then makes specific modifications. NY does not allow federal bonus depreciation or the accelerated depreciation from certain federal tax cuts; instead, NY requires you to add back the bonus amount and then you claim depreciation on a NY schedule over subsequent years. This means the timing of rental losses can differ: a loss that was large federally (due to bonus depreciation) might be smaller in NY, or a profit federally might turn into a smaller profit or loss in NY depending on depreciation differences. However, in terms of deduction allowances, NY respects the federal passive loss limitations. If your rental loss was fully used under the $25k exception federally, NY will allow the same. If it was suspended, it will be suspended for NY as well. New York essentially says: calculate your rental income/loss under NY depreciation rules, then apply the same passive loss logic. No additional NY-specific cap on rental losses beyond those adjustments. |
| North Carolina | Conforms mostly to federal rental deduction rules. NC starts from federal AGI. North Carolina has in the past decoupled from certain federal provisions (for instance, it disallowed bonus depreciation and certain section 179 amounts above a limit), so there can be differences in the amount of deductible depreciation. But NC does not impose a special rule to disallow rental losses beyond federal treatment. If you have a net rental loss federally, NC will reflect it after making any required add-backs (potentially reducing the loss if depreciation was added back). Any passive loss carryforwards will carry in NC too. |
| North Dakota | Follows federal treatment of rental income and losses. ND uses federal taxable income as the baseline, so rental losses and their limitations carry through from the federal return. North Dakota generally conforms to federal passive loss rules without independent alteration. So, ND taxpayers can deduct rental losses to the extent allowed federally (including the $25k allowance if applicable). ND may have minor adjustments for depreciation methods, but nothing that stops the use of losses long-term. |
| Ohio | Conforms to federal rules for rental deductions. Ohio’s state income tax begins with federal adjusted gross income. Therefore, any rental loss you deduct on your federal return will reduce your Ohio income similarly. If the loss is disallowed federally (passive loss carryover), it won’t show up in Ohio until it’s used federally either. Ohio doesn’t have separate passive loss calculations for personal income tax. (Note: Ohio has a unique deduction for business income called the Business Income Deduction, but rental income for most individuals is not considered “business income” for that purpose unless they’ve structured it as such. Typically, rental remains part of federal AGI flowing to Ohio, passive limitations included.) |
| Oklahoma | Follows federal rental income and loss deduction rules. Oklahoma uses federal AGI as a starting point, so it inherits the federal passive loss outcomes. Oklahoma generally conforms to the Internal Revenue Code for personal income, with adjustments like addback of bonus depreciation (common theme among states). These adjustments may slightly alter the numerical amount of a loss in a given year, but OK does not impose extra limits on deductibility of rental losses beyond that. |
| Oregon | Conforms to federal passive loss rules for rental property. Oregon’s tax system uses federal taxable income as the baseline and then makes some adjustments. Like other states, Oregon does not allow bonus depreciation and requires adding it back with a separate schedule to deduct it over time. That means your Oregon rental loss might be smaller than your federal loss in a year where you took special depreciation on the federal return. Nonetheless, Oregon will allow rental losses to offset other income to the same extent federal does. If federal limited your loss, Oregon will too. Oregon also has a state passive loss limitation for certain state-specific tax credit investments, but for regular rental real estate it mirrors federal treatment. So, no unique prohibition on using rental losses – they’re just subject to the usual federal-based rules. |
| Pennsylvania | Does not allow net rental losses for state income tax. Pennsylvania’s personal income tax has separate income classes and prohibits using a loss from one class to offset income from another. Rental income is one such class. In PA, you report rents and royalties on PA Schedule E, but if expenses exceed income, the loss is not deductible against your other income (and PA does not permit carryforwards of such losses). Essentially, Pennsylvania will report zero in that category if there’s a net loss. Unlike federal law, there’s no concept of passive loss carryover for PA personal tax – the loss simply cannot be used. So if you have no rental income in PA for the year, your rental expenses become unusable for that year on the PA return (though they still count on your federal return). Future year profits also cannot retroactively use prior year excess because PA doesn’t track carryovers. The only silver lining is that if you have multiple rental properties, PA will allow netting within that category in the same year (a profit on one and loss on another can offset). But a net overall loss in the rent/royalty category just results in $0 taxable income for that category, with the loss excess wasted for PA tax purposes. |
| Rhode Island | Follows federal rental deduction rules. Rhode Island uses federal AGI to start, so it upholds the federal treatment of rental losses and passive activity limits. RI does decouple from bonus depreciation (like many states, requiring addback and later subtraction), but aside from depreciation timing, Rhode Island has no separate restriction on rental loss deductions. If a loss is allowed federally, it’s allowed in RI; if carried forward federally, you’ll carry it in RI. |
| South Carolina | Conforms to federal rules on rental income and deductions. SC begins with federal taxable income, thus including whatever rental losses were reflected federally. South Carolina has historically decoupled from bonus depreciation and certain other accelerated deductions, so minor differences in a given year’s loss might occur. However, SC does not independently cap the use of rental losses beyond federal law. Passive losses not used will carry forward similarly for SC until you can use them (SC will follow federal carryforward when computing state taxable income in future years). |
| South Dakota | No state income tax. South Dakota has no personal income tax, so there is no state treatment of rental losses. Only federal rules matter for SD residents’ personal income. |
| Tennessee | No traditional income tax. Until 2020, Tennessee had the Hall income tax which taxed interest/dividends only. It never taxed wage or rental income. That tax is now fully repealed. Thus, Tennessee has no state income tax that would tax or allow deductions for rental income. Federal rules alone apply. |
| Texas | No state income tax. Texas does not tax personal income, so there’s no state-level rental deduction or income reporting. (Texas does have a franchise tax that might affect rental if held in certain business entities, but for individuals, no income tax.) |
| Utah | Follows federal rental income and loss rules. Utah uses federal AGI as the base, so any rental losses and limitations carry through from the federal return. Utah generally conforms to the federal tax code as of a recent year; like others it disallows bonus depreciation via adjustment. No additional Utah-specific limitation exists on using rental losses – they are treated in accordance with the federal passive loss rules. |
| Vermont | Conforms to federal treatment of rental expenses. Vermont starts with federal taxable income, so it inherits the federal passive loss limitations and allowances. Vermont requires certain state adjustments (like adding back bonus depreciation, as is common), but does not impose special limits on rental losses beyond those. If you have unused passive losses federally, they remain unused for VT until triggered later. |
| Virginia | Follows federal rental loss rules. Virginia’s tax calculation starts with federal AGI. Virginia does decouple from some federal provisions like bonus depreciation and certain business expensing limits (requiring adjustments on the Virginia return). These adjustments might change the timing of deductions for Virginia, but VA does not disallow the deduction of rental losses in general. It adheres to the federal passive loss concepts; if a rental loss was deductible against other income federally (under the special allowance), Virginia allows it too. If it was carried forward, Virginia similarly carries it forward. |
| Washington | No state income tax. Washington State has no personal income tax, so rental income or losses are not reported at the state level for individual owners. (Washington’s taxes that might touch rentals are things like property tax and business taxes for certain entities, but no income tax.) |
| West Virginia | Conforms to federal income tax rules on rental losses. WV uses federal adjusted gross income as a starting point, thus it accepts the federal treatment of rental expenses and passive losses. West Virginia doesn’t introduce additional barriers to using rental losses – any limitations are those that came from the federal side. WV also decouples from federal bonus depreciation, meaning the loss amount each year might differ slightly, but overall adherence to passive loss rules is consistent. |
| Wisconsin | Mostly conforms to federal rental deduction rules, with some depreciation tweaks. Wisconsin starts with federal income but has its own adjustments. WI often decouples from federal bonus depreciation and certain Section 179 expensing amounts, which means Wisconsin taxable rental income is recalculated with usually less accelerated depreciation. As a result, a rental loss might be smaller in WI than federally in a given year. However, Wisconsin does allow rental losses to be deducted in line with the federal passive loss regime. WI requires tracking of separate Wisconsin depreciation schedules, and any passive loss not allowed in a year will carry forward for Wisconsin if it carried forward federally. Wisconsin does not allow you to use a rental loss against other income unless it’s allowable under federal rules (e.g., the $25k exception if applicable by income). |
| Wyoming | No state income tax. Wyoming has no personal state income tax, so rental income or loss isn’t reported at the state level for individuals. Only federal tax rules apply. |
State Highlights: As seen above, most states mirror the federal approach: they’ll allow you to deduct rental expenses and even show a loss, but they won’t let that loss offset other income unless federal law does (and if federal suspends it, the state will too). The biggest exceptions are states like Pennsylvania and New Jersey, which never allow a net rental loss to affect your taxable income – if you have no rental income, your expenses simply don’t count for state tax. States without income tax (like Florida, Texas, etc.) don’t factor into this at all, since they don’t tax the income in the first place. Also, a common state nuance is depreciation adjustments: many states don’t follow federal accelerated depreciation (like bonus depreciation), which means the timing of your deductions can differ. This doesn’t stop you from deducting expenses with no income, but it might reduce the size of the deductible loss in that year on the state return, potentially leaving you with a smaller state loss or even no loss (when federal showed one). Always check your state’s instructions for any required modifications. But broadly, no state is more generous than the IRS in this area – state rules either align with or are more restrictive about rental loss deductions. Plan for your federal strategy first, and then adjust for your particular state’s rules.
Notable Court Cases and Tax Law History
The question of deducting rental expenses with no income has been shaped by both legislation and tax court decisions. Here are a few historical notes and cases that provide context:
- Section 212 of the Internal Revenue Code: This provision (dating back to the 1940s) allows a deduction for ordinary and necessary expenses incurred for the production of income (outside of a trade or business). Owning a rental property you hope to rent or profit from in the future can fall under this “for production of income” category if it’s not yet an active business. In the mid-20th century, courts allowed deductions under Section 212 for investment properties (like land held for appreciation or a house held for rental) even if they weren’t currently producing income – as long as the intent to produce income was clear. This was an early basis for permitting deductions on vacant, held-for-rent property.
- Tax Reform Act of 1986 – Passive Loss Rules: Prior to 1986, taxpayers with rental properties could often deduct losses freely against other income, which was sometimes abused as a tax shelter strategy (investing in property primarily to generate paper losses via depreciation). The 1986 tax reforms introduced Section 469 passive activity loss limits, fundamentally changing the game. While this didn’t disallow deductions, it deferred their benefit. It ensured that going forward, you couldn’t use rental losses (especially when you had no rental income) to wipe out taxes on salary or business income unless you met certain criteria. This law is why today we talk about “suspended losses” and needing passive income or eventual sale to realize the tax benefit of ongoing rental losses.
- Thomas v. Commissioner (1985) – Profit Motive Test: This Tax Court case, affirmed by the Fourth Circuit in 1986, is frequently cited regarding the necessity of a profit motive. The taxpayers in Thomas had claimed deductions for various investment activities that produced no income. The court held that a primary profit motive is required for deductions under both business (Section 162) and investment (Section 212) activities. If an activity is not engaged in for profit, Section 183 (hobby loss rule) limits apply. Thomas effectively made it clear that simply holding property and incurring expenses isn’t enough – you need an actual intent to make a profit (for example, through rent or eventual gain). This case helped cement the idea that landlords must show they’re genuinely trying to make money, not just generate losses for tax purposes.
- Tax Court Cases on Vacation Homes: Over the years, numerous cases dealt with vacation home rentals where owners had significant personal use. Before strict rules were in place, some taxpayers tried to deduct large losses by renting to friends briefly or setting high rents such that it rarely rented. Courts often disallowed most deductions in these scenarios, concluding there was no real profit motive or that personal use was the primary benefit. These abuses led to the clear formulas in Section 280A (enacted in the 1970s) that now govern vacation home rentals. A notable example was Bolton v. Commissioner (1979), which helped shape the IRS’s approach to allocating expenses in a vacation home scenario (the court in Bolton approved an IRS method of allocating expenses based on total days of use, which limited deductions – this eventually influenced how Section 280A regulations were written).
- Deducting Losses After Rental Activity Ends: Another relevant area of tax rulings involves what happens when a rental activity is winding down. For instance, cases have looked at whether expenses after the last tenant can be deducted (as rental or investment expenses) or must be capitalized into the sales price. While no single famous case stands out universally, the general principle from IRS rulings is: if the property is held out for rent until sale, expenses are deductible; if not, they’re selling expenses. This was reflected in IRS Revenue Rulings and is now explicitly stated in Pub 527 as we saw. Tax advisors often reference court decisions that have allowed or denied such expenses depending on facts – e.g., if a landlord clearly gave up on renting and only maintained the property to sell it, deductions were denied (except as adding to basis).
These legal landmarks all drive home the central theme: Congress and the courts allow landlords to deduct legitimate expenses, even in loss years, but only when the activity is truly for profit. Hobbyists or those trying to game the system get reined in by these rules. Understanding this history underscores why the current rules are so strict about personal use and profit intent.
Common Mistakes to Avoid with Zero-Income Rentals
Even seasoned property owners can slip up on the technicalities. Here are some avoidable mistakes when dealing with rental expenses in the absence of rental income:
- 🚫 Treating a Personal Home as a Rental on Paper: Don’t try to claim deductions for a property that you mostly use for yourself. For example, if you have a vacation home you didn’t actually rent out or seriously list for rent, you cannot just call it a “rental” to deduct the mortgage and utilities. The IRS can tell if there’s no rental advertising, or if your “rent” was just a token amount from a friend/family member. Avoidance: Only claim a property as rental if you truly converted it to rental use (e.g. moved out, listed it for rent at a market rate).
- 🚫 Failing to Document Rental Efforts: One big mistake is not keeping proof that your vacant property was genuinely available for rent. In an audit, you may need to show rental listings, agent agreements, or records of tenant inquiries. If you can’t produce evidence and the IRS agent hears “no income for two years,” they might deny the deductions. Avoidance: Keep copies of Craigslist ads, Zillow listings, emails with prospective tenants, or a contract with a property manager. These support your case that you were actively seeking renters.
- 🚫 Deducting Expenses During Personal Use Periods: Sometimes owners continue to deduct full expenses even after they’ve begun using the property personally. This is incorrect. The moment you start using the home yourself (and it’s no longer available for rent), those expenses should be taken off Schedule E. Avoidance: The day you decide to use the property (or remove it from the rental market), mark it down. From that date forward, stop claiming rental deductions (aside from possibly a prorated portion for that year). If it’s half-way through the month, for instance, allocate that month’s expenses between rental and personal appropriately.
- 🚫 Not Starting Depreciation on Time: Another pitfall is forgetting to start depreciation once the property is in service as a rental. Depreciation is often the largest deduction for a rental and it begins when the property is ready to rent, not when you first get a tenant. If you delay, you lose deductions (and correcting it later can require a complex IRS form). Avoidance: As soon as the property is available for rent, start depreciating it on your tax return (27.5-year schedule for residential, 39-year for commercial). Even with no rental income, you should be claiming depreciation each year. (Remember, if you don’t claim it, the IRS assumes you did when you sell – so not claiming doesn’t help you; it only hurts you.)
- 🚫 Misclassifying Capital Improvements as Expenses: During a vacancy, you might do upgrades (new roof, remodel, appliance replacements). A mistake is to deduct these costs as repair expenses. Major improvements must be capitalized and depreciated, not taken as an immediate write-off. Claiming a big improvement as a current expense could be disallowed in audit. Avoidance: Differentiate repairs (fixing something broken, minor maintenance) from improvements (bettering or adding to the property’s value). Improvements go on your depreciation schedule; only routine maintenance is expensed.
- 🚫 Forgetting the Passive Loss Rules: Some landlords assume a rental loss will automatically reduce their taxes, only to find out it was suspended. Misunderstanding the passive loss rules can lead to planning mistakes. Avoidance: If you have no other passive income and your income is above $150k, expect that the loss will carry forward. Don’t count on a refund from that loss in the current year. Plan long-term – know that you’ll get the benefit later, or strategize to generate passive income or qualify for exceptions if possible.
- 🚫 Not Filing Because “No Income”: Perhaps the most dangerous mistake is thinking you don’t need to report anything on your taxes if you had no rental income. If you want to deduct expenses or preserve the loss for future use, you must file a Schedule E showing the rental activity (even if income is zero). Failing to file means you lose the chance to claim those expenses or to start the loss carryforward clock. Avoidance: Always include your rental property on your tax return each year, even if it’s just expenses creating a loss. This way the IRS has a record, and you protect your ability to deduct those losses later.
- (On the flip side, if you truly have a property not in service and you’re not claiming anything, then no need to file – but then you also get no deductions. Don’t try to quietly accumulate expenses without reporting; it doesn’t work that way.)
- 🚫 Ignoring State Differences: As detailed above, your state might not honor your rental loss like the feds do. If you’re in a state like PA or NJ and you continue to incur rental losses, you won’t see a benefit on your state return. Some forget to adjust and end up with a tax bill surprise at the state level or incorrectly carry forward losses the state doesn’t allow. Avoidance: Learn your state’s rule. If your state disallows rental losses, understand that those expenses won’t help you on the state return and plan for potentially higher state taxable income than federal.
By sidestepping these common errors, you ensure that you only claim what you’re entitled to and that those claims will hold up under scrutiny. When in doubt, consult with a tax professional, because nuances in rental property rules can be complex – but at least now you’re aware of the big potential pitfalls.
Real-World Scenarios and Examples
To tie it all together, let’s look at a few concrete scenarios where a property has no rental income and how the tax rules would apply. These examples illustrate the nuances we’ve discussed:
1. Inherited Property Kept Vacant (Planning to Rent Eventually):
Imagine you inherit your late aunt’s house. It’s in a different city from where you live. In 2025, the house sits empty as you decide what to do. You’re considering renting it out, but you haven’t actively listed it yet because it needs some sprucing up. You spend money on property tax, insurance, utilities, and minor upkeep while you deliberate. Tax outcome: Until you actively place the home for rent, the IRS might view it as personal holding or investment, not an active rental property. The expenses you incurred in 2025 would not be deductible on Schedule E because the property wasn’t “held for rental use” yet – it was essentially personal/investment use. Mortgage interest and property taxes could be claimed as itemized deductions (if you itemize), but other costs like utilities or maintenance would simply be nondeductible personal expenses at this stage.
Now, suppose in early 2026 you clean it up and list it for rent. The property becomes placed in service as a rental in 2026. From that point on, you can start deducting expenses (and depreciation) on Schedule E. Any expenses prior to the listing date are essentially lost for deduction purposes (some of the cleaning or repair costs to get it ready might be deemed start-up costs or improvements – you could potentially capitalize some into the property’s basis). The lesson: To get deductions, you need to transition the inherited home to rental use as soon as practical – e.g., finish necessary repairs and advertise it. Otherwise, the carrying costs during your holding period aren’t helping you on taxes.
2. Out-of-State Rental Property Vacant All Year:
Suppose you own a rental condo in another state (say a beach condo in Florida), but this year you didn’t get any renters. You did have it listed with a local property manager and online, but the tourism downturn meant zero bookings. You flew down twice to check on it (not staying for personal vacation, just brief maintenance trips) and continued paying association fees, utilities, and maintenance. Tax outcome: Federally, you can still deduct all the usual rental expenses.
On Schedule E, you’d show zero rental income and then all your expenses (HOA fees, utilities, management fees, travel costs for inspection, etc.) which result in a loss. That loss will be handled per passive loss rules – if you qualify for the $25k exception and your other income is moderate, you might deduct it currently; if not, it will carry forward. Importantly, you have documentation through your property manager and listings that the place was indeed available for rent. There’s no personal use (you didn’t vacation there; your trips were purely for business, which you should document in case of questions). So IRS should accept those as valid rental deductions.
Now, state-wise: because the condo is in Florida (no income tax state), you don’t file a Florida return. But you do file in your home state (which taxes your worldwide income). If you live in a state like New York, California, etc., that state return will usually start with your federal income. They will see the rental loss passed through. Most likely, they’ll allow it just as federal did (with any depreciation differences accounted). If you live in Pennsylvania or New Jersey, however, things differ: PA wouldn’t allow that loss at all on the PA return; NJ would ignore it too.
You’d still get the federal benefit (if not suspended), but not state. This scenario underscores that out-of-state rentals follow the same federal rules – and also that you might have to file a nonresident return in a state if you had income. (In this case with no income, many states wouldn’t require a nonresident return, but always check thresholds. For example, some states require a filing if gross rent exceeds a small amount, even if net is zero.) Always maintain the for-rent status formally when you own property far away, to avoid any doubt about its use.
3. Short-Term Airbnb with a Temporary Pause in Listings:
Consider a homeowner who normally rents out a spare apartment in their home on Airbnb. In 2024, they had steady short-term rentals. In 2025, they decide to take a break from hosting for several months due to the pandemic or personal reasons. They block off the calendar from January through June and have no renters in that period. In July, they re-open to bookings and generate some income in the second half of the year. They also used the space themselves occasionally in the idle months (perhaps let relatives stay there).
Tax outcome: This is a tricky mix of short-term rental rules and personal use. If the average rental period when you did rent is only a few days, the activity might be considered more like a business (potentially not passive if you materially participate). But focusing on the no-income portion: during January–June, if you truly didn’t make it available for rent at all (calendar blocked and some personal use occurred), those months are essentially personal use of that space. The expenses attributable to that period (utilities, etc.) should not be deducted as rental expenses. When you resume in July, from July–December you can deduct the portion of expenses for that time. You would allocate annual expenses between personal and rental based on, say, nights rented vs. nights used personally vs. vacant. In this case, the vacancy was by your choice and effectively personal because you weren’t open for business. The IRS would likely treat that similar to how vacation home allocation works – the rental portion of expenses is only for the time it was actually available/rented.
So, you cannot deduct expenses for the period you paused hosting. If instead you had left it available but simply got no bookings in those months, that would be different – then it’s still rental use and deductible (with no income, yielding a loss). It hinges on whether it was available for rent. Additionally, since this is Airbnb, one must consider the personal use implications: if the space is part of your home and you use it personally some days, those count as personal use days. As long as your personal use days aren’t more than 14 days or 10% of rental days, you’re fine to treat it as a normal rental. But if your break was effectively personal use exceeding that threshold, then the vacation home limitation might kick in and limit your deductions to the amount of rental income. This example highlights the importance of clearly delineating personal vs. rental availability periods in short-term rental situations.
Also, note that if your Airbnb activity is substantial and you provide services (cleaning, breakfast, etc.), it might be considered an active business (Schedule C) rather than a passive rental – which could allow losses to offset other income without passive limits, but then self-employment tax might apply. It’s a complex area, but the safe route for a part-time host is to follow the rental rules and be mindful of personal use.
In all these scenarios, a common thread appears: the need for active, documented intent to rent, and careful tracking of usage. Real life can throw curveballs – maybe you inherit a house unexpectedly, maybe the rental market slumps, maybe you change your mind mid-year – but taxwise, you have to align your deductions with how the property was used or held out. By walking through examples, we see how the principles translate into practice.
FAQ: Deductions for Rental Expenses with No Income
Q: Can I deduct expenses for a rental property that had no tenants and no rent this year?
A: Yes. You can deduct rental expenses even with zero rent, as long as the property was available for rent and not used personally. Ordinary expenses (maintenance, insurance, taxes, utilities, depreciation) are deductible, creating a loss that may carry forward if unused.
Q: I didn’t rent my property at all and also didn’t try to. Can I still claim it as a rental on my taxes?
A: No. If you made no effort to rent it and had no renters, the IRS won’t treat it as a rental business for that period. Expenses in that case are personal or investment expenses (largely non-deductible, except possibly mortgage interest/property tax as personal itemized deductions).
Q: Do I need to file Schedule E for a rental property with no income?
A: Yes. If you want to claim deductions or record a loss, file Schedule E. It’s important to report the activity (even if just expenses) to establish any loss carryforward. Not filing means you won’t get to deduct those expenses now or later.
Q: My rental property was vacant all year – will the IRS audit me for showing a loss?
A: Not automatically. A loss with no income can be perfectly legitimate if you followed the rules (property was for rent, you have documentation, etc.). The IRS understands rentals can have off years. Just be sure you can substantiate your expenses and rental efforts in case of questions.
Q: Can I deduct the mortgage interest and property taxes on a vacant rental?
A: Yes. When the home is held as a rental, mortgage interest and property taxes are deducted on Schedule E (not on Schedule A). Even with no rent, they count as rental expenses. If the property isn’t yet a rental or has become personal, then you’d deduct those on Schedule A as personal itemized deductions (subject to mortgage interest limits and SALT tax deduction limits).
Q: What if I rented my property out for just 10 days last year and it was empty the rest of the time?
A: You likely can’t deduct much. Renting fewer than 15 days in a year means you need not report the income, but also cannot deduct rental expenses. The property is considered personal-use for that year. Only property tax (up to the SALT limit) and mortgage interest (if it qualifies as a second home) can be deducted on your personal return.
Q: I converted my personal residence into a rental in the last month of the year – no rent was collected yet. Can I deduct any expenses?
A: Yes (proportionally). Once you convert it to a rental and it’s available for rent, you can start deducting expenses from that point forward. You’ll prorate annual expenses between personal and rental for the year. For example, if conversion happened on December 1, you can deduct about one month’s worth of expenses as rental (plus any direct costs to transition to rental). The rest earlier in the year was personal use (not deductible on Schedule E).
Q: My state doesn’t allow rental losses. Does that mean I shouldn’t bother claiming expenses?
A: Claim them federally regardless. Federal law allows it, and you’ll benefit either now or in the future due to passive loss carryover. For state taxes, it’s true some states like NJ or PA will disallow the loss – so your state return might not show a benefit. But you still claim what you’re entitled to on the federal return. Keep track of state-specific rules separately; you might not see a deduction on the state this year, but if the property becomes profitable or when you sell, some states let you use those losses then.
Q: Can rental losses with no income be used to offset my salary or other income?
A: Usually not immediately. Rental losses are passive by default. They offset other passive income first. You can use up to $25,000 of loss against other income if you actively participate and your overall income isn’t too high (phase-out starts at $100k). If you don’t qualify or the loss is bigger, the excess loss will carry forward to future years.
Q: How long can I keep claiming losses on a rental that never has income?
A: Indefinitely, if it’s truly a for-profit rental. There’s no set limit in the tax code. You could have multiple years of losses as you try to rent or as the property appreciates for a future gain. However, expect scrutiny if it goes on too long without any revenue or if circumstances suggest you’re not genuinely attempting to earn income. It’s wise to periodically reassess and document your profit strategy.
Q: If I eventually sell the rental property, what happens to all the losses I couldn’t deduct?
A: They get released. In the year of sale, all accumulated passive losses for that property become deductible in full against any income (since the passive activity is ending). This can help offset the gain on the sale or other income in that year. You don’t lose them.
Q: Can I claim a tax loss for a rental property that was destroyed or abandoned and thus produced no income?
A: Possibly. If a rental property is destroyed (say by fire) or you abandon it, you may be able to claim a loss for the remaining value (basis) of the property. Destruction might qualify for a casualty loss deduction (subject to rules), and abandonment of a worthless property can be an ordinary loss. These are complex areas – documentation and sometimes formal intentions matter (e.g., declaring abandonment). It’s best to get specific tax advice in such cases.
Q: I let a family member live in my house rent-free this year. Can I deduct the expenses as a rental?
A: No. If someone (especially a relative) lives in the home for free or at a nominal rent, the IRS considers that personal use. A rent-free arrangement is not a for-profit rental, so you can’t deduct those expenses as rental expenses. You basically have a personal second residence in that scenario, and deductions are limited to mortgage interest and property tax on Schedule A (if applicable).