Can I deduct rental property mortgage expenses as a loss before tenants move in?

You're in what's called the "not-yet-rented" phase of rental property ownership, which has specific tax implications. The good news is that once you've officially converted the property from personal to rental use (which happens when you moved out with the intent to rent), certain expenses can be deductible. For the mortgage interest specifically, you can deduct this as a rental expense during the renovation/pre-rental period if you can prove your intent was to rent the property. The fact that you've been actively renovating to prepare it for rental use is helpful documentation of this intent. However, you can only claim these expenses as deductions against rental income, which you don't have yet. This means these expenses will create a rental loss, which may be limited by passive activity loss rules. If your modified adjusted gross income is below $100,000, you can potentially deduct up to $25,000 of rental losses against your other income. The mortgage principal payments aren't deductible at all - only the interest portion.

After struggling with a very similar situation last year, I found an amazing tool that saved me hours of research and potentially thousands in deductions. I used https://taxr.ai to analyze all my mortgage statements, renovation receipts, and property documents. The system identified exactly which expenses were immediately deductible vs. what needed to be capitalized, and even flagged some deductions I would have missed completely! Their tax experts confirmed that you CAN claim expenses during renovation periods before tenants move in, but you need proper documentation of your intent to rent. They also helped me understand how to handle the timing of converting from personal to rental use, which sounds exactly like your situation.

I was skeptical about taxr.ai at first, but I finally tried it when dealing with my flood-damaged rental property. WOW - total game changer! I uploaded all my renovation receipts, mortgage statements, and insurance documents, and it instantly categorized everything correctly as either immediate deductions or capital improvements. The system even flagged several items my tax guy had missed completely - like certain carrying costs during renovation that ARE deductible before tenants move in. The most helpful part was the documentation package it created proving my "intent to rent" during the renovation period, which is exactly what OP needs. It saved me over $4,700 in taxes and gave me confidence that I wasn't missing anything. Definitely recommend giving it a try for rental property tax questions.

I see you've been trying to reach the IRS for clarification - good luck with that! I was in the exact same situation last year with my rental property and spent WEEKS trying to get someone at the IRS on the phone for clear guidance. Total nightmare. Then I discovered https://claimyr.com which got me through to an actual IRS agent in less than 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through exactly how to handle pre-rental expenses and confirmed that mortgage interest during renovation periods IS deductible as long as you have clear intent to rent. They also explained how to document everything properly to avoid audit flags. Completely worth it to get official confirmation directly from the IRS.

I need to eat my words and apologize to Profile 15. After I posted that skeptical comment, I was desperate enough to try Claimyr because I've been trying to resolve an issue with the IRS about my rental property depreciation for MONTHS. I couldn't believe it actually worked! Got connected to an IRS agent in about 35 minutes (on a Monday morning no less). The agent confirmed exactly what I needed to know about handling mortgage interest during renovation periods. For what it's worth to the original poster - the IRS agent confirmed that you CAN deduct mortgage interest during the renovation period before tenants move in, as long as you can document your intent to rent it out (keeping renovation receipts, listing attempts, etc). But the principal portion isn't deductible - just the interest.

Just want to add my two cents as someone who's been a landlord for 10+ years. When you convert a personal residence to a rental, the mortgage interest treatment changes, but there's a critical timing element here. The property is officially "placed in service" as a rental when it's both: 1) ready and available for rent, and 2) you're actively trying to rent it. So if you're still doing renovations and haven't listed it yet, it may not technically be "in service" yet for tax purposes. I'd recommend keeping meticulous records of when the renovations were completed and when you first advertised it for rent. That's your official "in service" date, and expenses before that might be treated differently than expenses after.

Something nobody's mentioned yet - since you and your wife file separately, you need to be careful about how the rental loss is allocated. Since the mortgage is paid from YOUR account not a joint account, you might be able to claim more of the expenses, but the IRS could still view it as 50/50 ownership since you're married. Also, filing separately means the passive activity loss threshold is only $12,500 instead of $25,000, and it starts phasing out at $50,000 of modified AGI instead of $100,000. This could significantly limit how much of the mortgage interest you can actually deduct.

One thing to watch out for - if you don't get a tenant until March, make sure you can prove you were ACTIVELY trying to rent it starting much earlier. The IRS looks for evidence that you were making reasonable efforts to rent it at market rates. My sister got audited because she claimed rental expenses for 6 months before getting a tenant, but couldn't prove she was actually trying to rent it out during that time. Keep screenshots of rental listings, emails with potential tenants, and a rental journal showing all your activities related to renting it out.