Rental Is Vacant And Temporarily Offline

By Jason Watson, CPA
Posted Sunday, December 14, 2025

This is the taxicab that is in the shop for a new transmission. It cannot take a passenger right now (so it’s not technically “Idle” or ready), but the owner has every intention of putting it back on the street next week. Next month, really, since a new transmission takes some time, right?

In rental terms, this is the “renovation” zone. You are doing more than just fixing a leak; you are gutting a kitchen or tearing out the 1970s shag carpet. This is a critical scenario to get right so you don’t fall into the “permanently withdrawn from use … in the production of income” pit of misery. Zones. Pits. More metaphors being mixed.

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.

Renovations Plus Intent To Produce Income

Because the rental property is not “ready and available,” an aggressive auditor might argue that you cannot depreciate it. They might point to the “Idle” definition we just discussed and say, “Hey, this place is a construction zone, not a rental. You can’t rent a house with no toilet.” To the pit of misery!

You simply pivot your argument. You admit that the property is not “Idle” (ready), but you argue that it is “Temporarily Offline.” Huh? In your full nerdy yet confident voice you say, “Yeah, but it was placed in service three years ago, and I never withdrew it. I just paused operations to improve the asset for future income production.” And then don’t blink. Don’t even look away. 1,000-yard stare.

Some kidding aside, 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-

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 following the renovations, the ordinary and necessary expenses incurred are allowed rental property tax deductions in the interim.

Here is a win from Subt 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!

Another way to look at the in-service versus out-of-service conundrum- once an asset (rental property) is placed into service, it remains in service until the intent to produce income with the asset no longer exists. During renovations or other offline activities, supporting your intent to produce income with the rental property in the future becomes important.

Partial Asset Disposition (PAD)

Before you leave the construction zone, here is one advanced move we discussed in an earlier chapter. When you renovate, you are often tearing out old components (like a roof, HVAC, or that terrible 1970s carpet) and replacing them.

As a reminder, you can choose to write off the remaining value of the old component immediately (called a Partial Asset Disposition). This gives you a nice tax deduction now because you are effectively “disposing” of the old roof, for example, before you capitalize the new one.

Many rental property owners skip this because calculating the value of an old roof is difficult (you need to use the Producer Price Index or other nerdy accounting methods). If you don’t dispose of the old asset, you simply continue depreciating it alongside the new one. You won’t get in trouble for this “double depreciation,” but you might be leaving a tax deduction on the table.

Expenses During Immediate Renovations After Closing (The Trap)

Yet another reminder from that same chapter, the IRS gets suspicious when you buy a property and immediately start major renovations because the asset was never technically “held for the production of income” per IRC Section 212. If the property is never placed in service before the rehab starts, your holding costs during that period may be capitalized under IRC Section 266 (otherwise they are lost deductions).

The safest strategy is a specific sequence of events: place the property in service, make a genuine effort to find a tenant, and then take it temporarily offline for renovations. This establishes the property as a rental business first, anchoring your deductions. Be warned that your efforts to rent must be legitimate; as seen in Meredith v. Commissioner 65 Tax Court 34 (1975), half-hearted attempts to find a tenant won’t satisfy the IRS or the Tax Court. Here is the quote-

To the contrary, we have found that petitioner’s rental efforts were spasmodic and halfhearted during the years in issue. We can only conclude that petitioner did not make a bona fide attempt to rent the property during these years.

Spasmodic? Mom is Ok with it, so you have that going for you.

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.