Rental Is Vacant And Withdrawn From Service (Use)

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

There is a subtle difference between taking a rental property offline versus removing it from service. As we’ve discussed, renovations, repairs and improvements do not take the rental property out of service if it remains held for the production of income. Rather it is simply unavailable for occupancy (temporarily offline).

Here are some common reasons to no longer hold the property for the production of income and therefore take the rental out of service-

• You want to sell the rental property but it needs renovations first.
• Your mother is aging and you feel she should move into your rental property until she is ready for assisted living accommodations.
• It’s been a good run, and now you are wanting to use the rental property as a second home.

We could go on and on, right?

Deductions When Out of Service to Sell

Please recall our discussion regarding expenses between the closing date and available for rent date where several expenses are not deductible. A similar situation exists when the rental property is no longer held as available to rent.

If you take the rental property offline for renovations and you do not intend to rent it again, but rather sell it or convert to a primary or second home, the asset is no longer being held for the production of income.

This is the most common heartbreaker. You have a rental. The tenant moves out. You decide, “You know what? I’m tired of tenants. I’m going to renovate this place and sell it.” You just killed your rental business. By changing your intent from “holding for rent” to “holding for sale,” you have withdrawn the asset from the rental service.

Welcome to the Pit of Misery. Dilly dilly.

This is where tax deductions go to die. According to Treasury Regulation Section 1.168(i)-8, an asset is considered “retired” or “withdrawn” when you permanently remove it from use in your trade or business. Depreciation? Stops immediately. Operating Expenses? Generally become non-deductible personal expenses (or “investment expenses” that are permanently non-deductible because of OBBBA).

Still An Active Business (The Argument)

A real estate investor could argue that a rental property that meets the standard of being a trade or business, continues to do so while the property is being held for sale. Recall the definition of a “trade or business” which comes from common law. The Supreme Court has interpreted “trade or business” for purposes of IRC Section 162 to mean an activity conducted with “continuity and regularity” and with the primary purpose of earning income or making a profit.

With respect to depreciation, there is some case law supporting this perspective. In Lenington v. Commissioner, Tax Court Memo. 1966-264, the court answered the question, “can petitioners deduct depreciation on poultry buildings after they ceased operating their poultry business but while the buildings were for sale?” The court reasoned as follows-

Since the poultry buildings were not abandoned or converted to personal use prior to 1962, but were involved in a discontinuance of the active conduct of the poultry business, their previously established character as business property was not changed.

The Rebuttal (Legislative Grace)

However, IRC Section 62(a)(4) reads-

(4) Deductions attributable to rents and royalties.
The deductions allowed by part VI ( Sec. 161 and following), by section 212 (relating to expenses for production of income), and by section 611 (relating to depletion) which are attributable to property held for the production of rents or royalties.

In a 1944 report from the Committee on Finance, Senate Report 885, 1944 C.B. at 877-878-

Similarly, with respect to the deductions described in clause (4), the term “attributable” shall be taken in its restricted sense; only such deductions as are, in the accounting sense, deemed to be expenses directly incurred in the rental of property or in the production of royalties.

1944 was a zillion years ago, agreed. However, in a 2001 Ninth Circuit appeal of Strange v. Commissioner, the court affirmed and referenced IRC Section 62(a)(4) in similar fashion by stating in part-

In this case, our task is to interpret I.R.C. § 62(a)(4), providing for deductions from gross income (“above-the-line deductions”). The Tax Court’s construction of this statute involves a question of law subject to de novo review. See Sliwa v. Commissioner, 839 F.2d 602, 605 (9th Cir.1988). Because tax deductions are a matter of legislative grace, statutes providing for them should be narrowly construed against the taxpayer. Deputy v. du Pont, 308 U.S. 488, 493, 60 S.Ct. 363, 84 L.Ed. 416 (1940).

Section 62(a)(4) provides for above-the-line deductions for expenses “attributable to property held for the production of rents or royalties,”

Matter of legislative grace. Narrowly construed against the taxpayer. Wow!

The “Yes… But” Trap

IRS Publication 527 Residential Rental Property reads in part-

Vacant while listed for sale.
If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. If the property isn’t held out and available for rent while listed for sale, the expenses aren’t deductible rental expenses.

Did you catch the whiplash in that IRS blurb? It is contradictory-

• Sentence 1 says “Yes”: You can deduct expenses until the rental property is sold.
• Sentence 2 says “No”: …but only if it is still available for rent.

This is the “gotcha.” Most sellers want the property vacant for easy showings and a clean closing. But the moment you stop “holding it out for rent” (because you want it empty for the buyer), Sentence 2 kicks in and kills the deduction promised in Sentence 1. Don’t stop reading after the first period!

Alrighty then. We really beat that up. The bottom line is this- expenses, including depreciation, are no longer deductible once the rental property is not ready and available for rent and is listed for sale. There might be wiggle room for mortgage interest as a second home deducted on Schedule A of your individual tax return (Form 1040) along with property taxes.

Practical Advice

Ideally, you would keep the rental property occupied while you are wanting to sell. This could be good and bad; it is good if you are selling to another real estate investor, but bad if you are wanting to include families and those who do not want an existing tenant. Also, tenants will not share the same objective or motivation as you. Financial incentives might be required to align everyone’s interests.

Not all is lost on expenses incurred while selling. There might be some expenses directly related to the sale such as real estate commissions, marketing and advertising expenses, repairs or maintenance requested by the buyer, and all the other usual suspects. Some people argue that utilities, such as electricity to keep the rental property in good order for showings, are a selling expense, but this is not definitive.

Personal Use Creep And Inaction Drift

You kick the tenant out to renovate. The renovation drags on. You start using the place for weekend getaways or let your brother-in-law crash there rent-free while he “helps” with the painting. If you use the property for personal purposes for more than 14 days (or 10% of rental days), you risk reclassifying the property as a vacation home and your tax deductions and therefore losses are limited to your revenue (which is likely $0).

Moving on to inaction. In Newberry v. Commissioner, 76 T.C. 441 (1981), the Tax Court disallowed deductions because the owner couldn’t show a “continuous and regular” effort to rent the property. The owner argued the property was just “idle.” The court said no, it was “withdrawn” because there was no active intent to rent it. If you let the house sit for two years with no permits pulled and no work done, you aren’t renovating. You’re retired.

Keep your property in the “Temporarily Offline” zone. Keep the permit active. Keep the intent to rent again clear like the Subt tax court case. Stay out of the pit of misery.

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