Contributed by: Henry, FreeTaxUSA Agent, Tax Pro
Sometimes a property is made available to rent but doesn’t get rented right away. As the property owner, you are likely covering expenses such as the mortgage, property taxes, insurance, and utilities. Without rental income to report, you might be wondering how to handle these pre-rental expenses on your tax return.
Can you deduct your rental expenses if you didn’t have rental income?
The IRS says you can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent (usually that’s the date the property is ready for tenants and you put the ‘For Rent’ sign in the front yard). This means it’s possible to file Schedule E and claim rental expenses without having any rental income to report.
For example, you converted your primary residence to a rental and made it available to rent on December 1, 2024. It didn’t get rented until January 1, 2025. You can file Schedule E with your 2024 tax return and claim your rental expenses for December.
How to report rental expenses using FreeTaxUSA
Enter information about your rental in the software by following this menu path: Income > Business Income > Rental Income (Schedule E).
First, you’ll be prompted to provide some basic information about the property. When you’re asked about personal use of the rental, it’s referring to the number of days you used the property AFTER converting it to a rental.
As you continue, you’ll be asked how many days you rented the property. If you enter 0 days rented to others, the follow-up question is “Did you try to rent it?" If the answer is yes, it's still considered a rental even though it wasn’t actually rented. You’ll be able to proceed to the expenses screen where you can deduct rental costs starting from the day it became available for rent.
Apportioning expenses
When entering your rental expenses, be sure to only enter amounts applicable to the portion of the year the property was a rental.
Using our example from above, if you’re claiming your real estate taxes for 2024, you would enter 1/12 of the total real estate taxes paid as a rental expense because the property was available for rent 1 month out of the 12 months in the year. The remaining 11/12 of the real estate taxes are claimed as an itemized deduction on Schedule A.
Any expenses that only apply to the rental (such as advertising or management fees) can generally be fully deducted.
What about expenses incurred to get a property ready for rental?
Deductible rental expenses begin only when the property is available for rent. If you incur costs to improve the property before placing it into service as a rental, those expenses are typically added to the property’s cost basis and depreciated.
Refer to IRS Publication 527 for more information on how to figure your property’s basis for depreciation.
How does a rental loss affect your tax return?
Rental income is considered passive income. This means a rental loss can usually only be used to reduce other passive income on your tax return.
If you aren't able to fully deduct your rental loss in the current year, it can be carried forward to next year’s tax return. When you go to prepare your return next year, look for your passive loss carryovers on Form 8582 of your prior year return. Unallowed losses on Form 8582, Part VII are the losses that carry forward to the next year.
