Rental Expenses and Depreciation Before the First Tenant

Can expenses be claimed on a rental with no tenant or rental days yet?

Depreciation starts on the date the property is ready and available for rent. A tenant is not required. Publication 527 allows ordinary and necessary expenses of managing, conserving or maintaining a rental from the time it is available for rent, and depreciation begins when the property is placed in service (Publication 946).

Costs from before that date are treated differently. The cost of acquiring a building must be capitalized: added to what you paid for it (your basis) and recovered through depreciation instead of deducted at once. That cost includes work done before the building is placed in service (26 CFR 1.263(a)-2(d)(1)). Repairs, paint and flooring done before listing a property you bought to rent are therefore generally added to basis, not deducted. A former home follows different rules; see the personal-use section below.

A case is not simple when the make-ready was large, months passed between closing and listing, the purchase was near year end, the available date is unclear, or a filed return already deducted pre-listing costs. Gather the closing statement, dated invoices split by room and type of work, the listing date and the first lease.

What does "ready and available for rent" mean, and what is the placed-in-service date?

A property is placed in service when it is ready and available for its specific use, even if no one is using it (Publication 946; Publication 527). For a rental, that is the date the unit is finished and offered for rent, not the date a tenant signs. Publication 527 asks whether the property is held out and available for rent, so a unit finished but kept for your own stays does not count; see fair rental days and personal use.

Publication 527 gives examples rather than a checklist:

Publication 527 does not say what happens when a unit is finished before it is listed. The date to document is when the unit was both finished and offered for rent: keep the listing with its asking rent, the advertisement and dated photos.

When does depreciation start: at purchase, when I advertise, or at the first tenant?

Depreciation starts on the placed-in-service date. It does not start at closing, and it does not wait for the first tenant.

A residential rental building is depreciated over 27.5 years. A mid-month convention treats it as placed in service in the middle of that month, so the first year counts half of that month plus each full month after it. Land is not depreciable. Appliances, carpets and furniture use a 5 years schedule, and each item starts when it is installed and ready. If more than 40% of the year's basis in such property (buildings excluded) is placed in service in the last three months, the mid-quarter convention applies instead of the half-year one (Publication 527). Items acquired after January 19, 2025 may also qualify for the 100% special depreciation allowance; the building does not (Publication 946). The allowance applies unless you elect out for the whole class of property placed in service that year, by a statement with the timely filed return; a timely filer who missed it can still elect out on an amended return within 6 months after the unextended due date (Form 4562 instructions). An owner may elect a longer alternative depreciation system for a residential rental building only in the first year it is placed in service, and can never revoke it (Publication 527).

Depreciation goes on Schedule E, line 18. Form 4562 is attached for property first placed in service that year (Schedule E instructions).

Can repairs done before the placed-in-service date be deducted?

Generally no, for a property you bought to rent. Work done before the property is placed in service is part of the cost of acquiring it, even if the same work would be a repair once the property is rented (26 CFR 1.263(a)-2(d)(1)). The regulation's own example is a building bought for a business office, where the owner paid to repair steps, refinish floors, patch walls and paint before placing it in service. Those amounts were capitalized, although the work was not an improvement (Example 10, same section). The rule is not limited to offices, so work on a rental building before it is placed in service is generally capitalized the same way. It joins the basis of the property it is for and is depreciated from the placed-in-service date.

The regulation excepts materials and supplies and the elective de minimis safe harbor, which lets an owner deduct small items: up to $2,500 per invoice or item, only if the owner's books already expense such items under a consistent practice in place at the start of the year, and elected by a statement on a timely filed original return (26 CFR 1.263(a)-1(f); IRS tangible property rules). Whether a pre-listing invoice that meets one of them counts as a rental expense is a question for a preparer.

After the placed-in-service date, the repair or improvement test applies. Fixing a material defect that existed when the owner bought the property is a betterment, a kind of improvement that is capitalized, whether or not the owner knew of it (26 CFR 1.263(a)-3(j)(1)(i)). The repair or improvement guide covers the tests.

Which costs can I deduct once the rental is available but vacant?

Ordinary and necessary costs of managing, conserving or maintaining a rental, including depreciation, may be deductible while the property is vacant, if it is held for rental (Publication 527). A cash-basis owner generally deducts a cost in the year it is paid.

Publication 527 does not say how to treat holding costs from before the available date, and the start rule does not bar them. Section 212 allows ordinary and necessary costs of managing, conserving or maintaining property held to produce income, even when it is not yet productive (26 CFR 1.212-1(b)). Insurance and utilities on a property you hold to rent may therefore be deductible before it is available, if the facts show that purpose; interest and real estate tax have their own deduction rules. Other rules can change the result: start-up cost rules (section 195) may apply if the rental is a business, and a section 266 election can capitalize taxes and interest on construction or improvement work until it is finished, made by a statement filed with the original return (26 CFR 1.266-1). Publication 551 says casualty insurance premiums, rent and utilities charged at closing for the time before closing are not basis but are deductible as business expenses if they relate to business property. Keep these bills dated and have a preparer decide.

Can I deduct the rent I lost while it sat empty?

No. Publication 527 does not allow a deduction for rental income lost while the property is vacant, and a cash-basis owner cannot deduct rent never collected, because it was never included in income.

Expenses and depreciation for the vacant months still count. A year with no rent can therefore show a rental loss on Schedule E, which the passive-loss rules may limit; see rental property taxes.

What goes on Schedule E when I bought late and have no rental days?

Only a property that reached the available date by December 31 has depreciation for that year, and Publication 527 starts rental expenses there too. A property still being made ready on December 31 has no depreciation; its purchase and make-ready costs are tracked as basis for the first rental year, and holding costs paid that year are reviewed separately (see the holding costs above).

A property that was available but not rented is listed on Schedule E with no rent, the expenses from the available date, and depreciation from that date. Line 2 asks for days rented at fair rental value and personal-use days; an unrented property nobody used has zero of each (Schedule E instructions).

Keep for next year: the closing statement, invoices split by date, room and type of work with each job's end date, the listing and dated photos, the start dates of insurance and utilities, and the first lease. The records guide covers proof when a receipt is missing.

Does depreciation continue while the rental is idle for a long renovation?

It depends on whether the property was already placed in service.

• Never yet available: Depreciation has not started. The renovation costs are capital, and the placed-in-service date is the day the work is finished and the unit is offered for rent.
• Already in service, then idle: Depreciation generally continues. Publication 527 says to keep claiming it on rental property that is temporarily idle, and its example is repairs after a tenant moves out.

Publication 527 lists the events that take property out of service: a sale or exchange, conversion to personal use, abandonment and destruction. It does not list a renovation, and the sources do not define how long "temporarily" lasts, so the facts decide; keep dated proof of the plan to rent again.

Work on a property already in service follows the repair or improvement tests. An improvement is depreciated as separate property, starting on the later of its own placed-in-service date and the property's (Publication 527).

Where do closing costs and loan costs on the purchase go?

Fees for buying the property go into basis. Fees for getting a loan do not (Publication 551).

• Basis: legal fees, title search, owner's title insurance, recording fees, surveys, transfer taxes, charges for installing utility services, and amounts the seller owed that you agreed to pay, such as back taxes.
• Not basis: points, origination fees, mortgage insurance premiums, a credit report and a lender-required appraisal. These are costs of getting a loan, generally deducted over the loan term.

The closing statement guide covers each line, including prepaid insurance, pre-closing charges and escrow deposits, and splitting land from building.

What if I use the property myself, or it is listed for sale as well as for rent?

A former home becomes a rental on the date it changes to rental use, when it is available for rent rather than when the owner moves out. Yearly costs such as taxes and insurance are divided between the personal and rental periods, depreciation treats that date as placed in service, and the depreciation basis is the lesser of fair market value and adjusted basis on that date (Publication 527). A home changed to rental use on June 1 gets seven-twelfths of the year's taxes and insurance as rental expense, and monthly bills such as utilities count from June. Insurance and depreciation for the personal part of the year are not deductible; mortgage interest and real estate tax for that part can go on Schedule A if you itemize.

Adjusted basis includes permanent additions and improvements. Repairs paid while it was still your home are personal costs, not rental expenses. The sources read do not say how repairs made between moving out and listing are treated; keep them dated and ask a preparer.

A unit the owner also uses divides its costs by days of use, and its deductions can be limited if it counts as a home; the fair rental days and personal use guide covers the day counts.

A property listed for sale keeps its rental deductions only while it is still held out and available for rent. Otherwise its costs are not deductible rental expenses (Publication 527).

Example

All figures are in US dollars and are illustrative.

Bought in March, listed in June

An owner buys a house to rent on March 10, never lives in it, and spends US$20,000 on flooring and repairs before listing. The building's share of the price and closing fees is US$145,000. The unit is ready and listed on June 15, and the first tenant starts September 1.

• Placed in service: June 15. The September 1 lease does not change it.
• Basis: US$145,000 plus US$20,000 of work is US$165,000. The work is not a current deduction.
• Depreciation: over 27.5 years, a full year is US$6,000. Mid-month treatment gives the first year six and a half months, or US$3,250. This treats all the cost as building cost; carpets and appliances are 5-year property and may qualify for the special allowance, so a preparer should split them out.
• Running costs: insurance and utilities from June 15 are deductible; earlier ones need separate review.

Bought December 12, still being renovated on December 31

The unit is not available for rent by year end, so it has no depreciation for that year. Holding costs paid that year need separate review before deciding what, if anything, to list on Schedule E. The price, closing fees and renovation invoices are tracked as basis. If the unit is finished and listed on March 3 of the next year, depreciation starts in March on the full basis, including the renovation.

Condo listed October 1, no tenant by year end

A condo the owner bought to rent and never used is listed at a fair rent on October 1 and is not rented by December 31. Insurance of US$600 and association dues of US$900 for October to December are deductible, and depreciation starts in October. The rent the owner hoped to receive is not deductible. Schedule E shows no rent and a loss equal to the US$1,500 plus the October to December depreciation, which the passive-loss rules may limit.

Different for you?

• The make-ready was large, months passed between closing and listing, the dates are unclear, or a filed return already deducted pre-listing costs or started depreciation early: the placed-in-service date decides which invoices are basis and when depreciation starts, and Publication 527 does not settle how interest, property tax, insurance and utilities paid before it are treated. Publication 946 says a change in the placed-in-service date is not an accounting method change and is made on an amended return, filed within 3 years after filing the original return or 2 years after paying the tax, whichever is later. Capitalizing costs a filed return deducted can instead be a change in method of accounting, which depends on the facts and on how many returns used the treatment (Publication 946). Have a preparer settle the date, the invoices and which route applies, with individual tax help.
• Depreciation was never taken: see missed depreciation on a rental.
• You need to sort repairs from improvements: see repair or improvement for a rental.
• You own several properties: see setting up accounts for rental property.
• It is a short-term rental with no bookings yet: see Airbnb: Schedule C or Schedule E.
• You also stay in the property: see fair rental days and personal use.
• The first-year loss may offset other income: see rental property taxes for the passive-loss limits.
• You live outside the US, or are not a US citizen or resident: the forms and withholding differ; see nonresident landlords or, if you live in Canada, Canadians with US rental property.
• The rental is in an LLC or owned with others: see rental property in an LLC and co-owned rental: Schedule E or partnership return.