Idle Property Versus Vacant Rental Property

By Jason Watson, CPA
Posted Sunday, May 25, 2025

Here are two pieces of verbiage from IRS Publication 527 Residential Rental Property–

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.

Just jump right into the code and the pubs? No foreplay? Sorry…

How is idle different than vacant. The IRS publication is terribly vague and perhaps duplicative suggesting that idle and vacant are synonymous. Practically they are, but technically they are not.

To be fair, the idle property blurb is under a section on depreciation whereas vacant rental property is under a section on types of deductible rental property expenses. Also, idle property is not limited to rental properties- it can be applied to any asset associated with a business activity including real estate.

IRS Publication 946 How to Depreciate Property has another version of idle property-

Idle Property
Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle (not in use). For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine.

We sure belabored the heck out of that. Why does this matter to a rental property owner?

You can take the rental property out of service for definite periods of time to make minor repairs including renovations, or what the IRS calls managing, conserving and maintaining. Here is the subtle difference between idle and vacant- you can depreciate your idle property for definite periods of time, and you can deduct your operating expenses associated with your vacant rental property. One is an asset matter (depreciation) and the other is an operating expense matter. Yeah, we geeked out there and split some nerdy hairs.

However, be careful! The phrase “idle property” has also been loosely used in various tax court cases as a negative- in reference to rental properties, idle generally means the property is not available for its intended purpose nor is there is a genuine or legitimate intention to make it available in the future.

Here is another take on this- an asset, such as a rental property, that is not ready and available for occupancy, and is not being held out for rental use through advertising and related efforts, might be considered idle. Having said that, most tax court cases and the accounting industry use vacant versus idle when it comes to rental properties.

As mentioned elsewhere, getting the rental property placed in service as quickly as possible is the key. Additionally, making certain improvements and performing renovations will likely deem the property not ready and available which in turn causes the activity to no longer be a rental activity. This affects the treatment of your hours spent for material participation testing (but might count towards your 750 hours for real estate professional status).

Expenses Immediately After Closing Before First Tenant or Guest

If your rental property is not ready and available for occupancy, and in line with IRS Revenue Ruling 99-23 and IRC Section 195, operating rental property expenses such as mortgage interest, insurance, real estate or property taxes, utilities and HOA dues during renovations are not deductible.

You could possibly deduct the mortgage interest as a second home, but further discussion is required. You might be able to deduct the property taxes subject to the current $10,000 combined state and local tax limitations on Schedule A of your Form 1040 tax return.

What’s the answer? The answer is to make that rental property ready and available for rent as soon as possible, and hold the property out for rental use (advertise and related efforts). Otherwise, you will be in no-man’s land or what some call “pre-rental status” where the rental property has never been rented before and is not yet ready for occupancy.

Consider this- you purchase a rental property on July 1, and it is generally ready to rent. Nothing says you must immediately pay a bunch of money for fancy pictures, staging and VRBO listings. The rental property is available with nothing more than your willingness and a habitable dwelling. Then you can start shooting the money canon. See our rental property in-service defined on page 85 for more exacting information.

Nothing says you must align your rent fee with market conditions; for example, you buy a ski condo on September 1. No one is going to rent your condo until at least Thanksgiving, but it is available to rent, and as such you are considered operating.

Nothing says you cannot have the rental property available for occupancy, and simultaneously be painting various bedrooms and walls waiting for your next tenant or guest.

Know the rules. Assert your facts accordingly. Carrying a big stick isn’t a bad add-on.

Expenses During Renovations After Being A Rental

Can you deduct typical rental expenses such as mortgage interest, insurance, real estate or property taxes, utilities and HOA dues during renovations? The answer is a definite maybe.

The deciding factor comes from IRC Section 212 where the rental property must be considered to be property held for the production of income. Specifically, the tax code reads-

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—

(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income; or
(3) in connection with the determination, collection, or refund of any tax.

As such, under subparagraph 2 above, if you can demonstrate that you genuinely intend to continue holding the property out for rental use and to produce income, the ordinary and necessary expenses incurred are allowed rental property tax deductions.

Here is a win from Subt, Claire, et vir. v. Commissioner, Tax Court Memo 1992-448, where the court allowed operating expense deductions for two years during renovations-

Section 212 allows as a deduction all the ordinary and necessary expenses paid during the year for the production or collection of income (sec. 212(1)) or for the management, conservation, or maintenance of property “held for the production of income” (sec.212(2)). Section 167(a)(2) allows as a deduction a reasonable allowance for depreciation of property “held for the production of income.” The phrase “held for the production of income” has the same meaning in section 212 and section 167. Mitchell v. Commissioner, 47 T.C. 120, 129 (1966). Expenses and depreciation may be deducted only if the property is held for production of income during the taxable year at issue. Meredith v. Commissioner, 65 T.C. 34, 41 (1975). Under section 1.212-1(b), Income Tax Regs., ordinary and necessary expenses paid or incurred in the management, conservation, or maintenance of a building devoted to rental purposes are deductible notwithstanding that there is actually no income therefrom in the taxable year.

The record supports a finding that petitioners held their Merle property during 1987 and 1988 for the production of income under section 212(2), and that some of the expenses they incurred during this period were for the management, conservation, or maintenance of property held for the production of income under section 212(2). The property was not used by them personally; the property had been rented in previous years; petitioners intended to rent the property in the future or sell it; and the reason why no income was produced by the property during the years in question was because of the ongoing renovations to the property. Additionally, petitioners ran several newspaper advertisements during 1988 offering potential tenants accommodations they would make to suit the needs of business occupants. The fact that the property realized no income during the years at issue is not determinative. Petitioners, therefore, are sustained on this issue.

Having found that petitioners held the property for the production of income within the meaning of section 212, it follows that depreciation, taxes, utilities, operating, and permit expenses are allowable for the 2 years at issue.

Yay!

Expenses During Immediate Renovations After Closing

The problem becomes when you purchase a rental property and immediately start renovations. The IRS, tax code and tax court all mince words like “held for production of income” and “in-service” and “ready and available” and all other sideways verbiage. IRC Section 212 allows for the deduction of ordinary and necessary expenses for the management, conservation and maintenance of property held for the production of income. Neat.

However, the IRS seems to rely on “in-service” whereby if the property was never a rental property by being placed into service as we defined elsewhere, it is not being held for the production of income. In other words, you need to place the rental property into service first, even if it is no longer ready and available during renovations, for it to be deemed held for the production of income.

What is the key takeaway here? Put the rental property in service, make a legitimate and genuine effort to produce income (i.e., finding guests or tenants) and then take it offline to start renovations. This little nuanced sequence of events is important for maximum rental tax deductions.

Is this a crummy deal? Sure. Could you take a risk-based attitude by taking the reasonable position that you don’t necessarily need to put the rental property into service to support IRC Section 212’s provisions? Maybe.

Expenses Incurred Finding Guests or Tenants

If you are unable to find guests or tenants, common rental expenses remain deductible. However, you must be reasonable in your efforts to find guests or tenants. In other words, your efforts must be legitimate. In the tax court case, Meredith v. Commissioner, 65 Tax Court 34 (1975), a rental property was vacant for multiple years, and the court ruled that efforts to find a tenant, to produce income, was not legitimate.

See our what time counts for material participation section on page 125 for more information. Also, see our rental property in-service defined section to understand the nuances of ready and available, and held out for rental use.

Material Participation Applied

Your ability to deduct certain operating expenses for a vacant rental property hinges in part on the placed in service standard found in Treasury Regulations Section 1.46-3(D)(1)(ii) and held for the production of income standard of IRC Section 212.

Time spent for material participation works the same way. If you put a rental property into service, take it offline for renovations, and do those renovations yourself including managing contractors directly, that time counts.

Taking The Rental Offline For Repairs or Renovations

This might be repetitive, but once a property is placed in service, it remains in service even if you take it offline for repairs or renovations provided that you intend to rent it again and consider the property held for producing income. Said differently, once placed in service, it remains in service unless it is no longer held for producing income. This includes seasonal downtimes.

Summary

As mentioned in this section and elsewhere, placing the rental property into service where it is ready and available for occupancy, and held out for rental use, is the first obstacle. If you can also demonstrate that the rental property is being held for the production of income, then expenses during vacancy may be deducted and time spent may be counted for material participation.