! sonal purposes — Publication 527

CAUTION 2025 on Schedule 1-A (Form 1040) for the vehicle

loan interest allocable to your personal use, then you can't claim a deduction for that same interest on Schedule E (or Schedule C, if applicable). See Schedule 1-A (Form 1040) and its instructions for more information.

Pre-rental expenses. You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent.

Rental of equipment. You can deduct the rent you pay for equipment that you use for rental purposes. However, in some cases, lease contracts are actually purchase contracts. If so, you can’t deduct these payments. You can recover the cost of purchased equipment through depreciation.

Rental of property. You can deduct the rent you pay for property that you use for rental purposes. If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease.

Travel expenses. You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. You must properly allocate your expenses between rental and nonrental activities. You can’t deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. The cost of improvements is recovered by taking depreciation. For information on travel expenses, see chapter 1 of Pub. 463.

To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Pub. 463.

Uncollected rent. If you are a cash basis taxpayer, don’t deduct uncollected rent. Because you haven’t included it in your income, it’s not deductible.

Publication 527 (2025) Chapter 1 Rental Income and Expenses (If No Personal

Use of Dwelling)

If you use an accrual method, report income when you earn it. If you are unable to collect the rent, you may be able to deduct it as a business bad debt. See section 166 and its regulations for more information about business bad debts.

Vacant rental property. If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you can’t deduct any loss of rental income for the period the property is vacant.

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.

Points

The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. These charges are also called loan origination fees, maximum loan charges, or premium charges. Any of these charges (points) that are solely for the use of money are interest. Because points are prepaid interest, you generally can’t deduct the full amount in the year paid, but must deduct the interest over the term of the loan.

The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. In this case, points paid (or treated as paid (such as seller paid points)), by a borrower to a lender increase OID which is the excess of:

Stated redemption price at maturity (generally the stated principal amount of the mortgage loan) over
Issue price (generally the amount borrowed reduced by the points).

Note: For more detailed information to determine OID on a mortgage loan, including how to determine the stated redemption price at maturity and issue price of a mortgage loan, see the regulations under section 1273.

The first step to determine the amount of your deduction for the points is to determine whether your total OID on the mortgage loan, including the OID resulting from the points, is de minimis. If the OID isn’t de minimis, you must use the constant-yield method to figure how much you can deduct.

De minimis OID. The OID is de minimis if it is less than one-fourth of 1% (0.0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity (term of the loan).

If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year.

On a constant-yield basis over the term of the loan.
On a straight line basis over the term of the loan.
In proportion to stated interest payments.
In its entirety at maturity of the loan.

You make this choice by deducting the OID (including the points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued.

Example. Carol took out a $100,000 mortgage loan on January 1, 2025, to buy a house she will use as a rental during 2025. The loan is to be repaid over 30 years. The loan requires interest payable each year at a fixed rate. During 2025, Carol paid $10,000 of mortgage interest (stated interest) to the lender. When the loan was made, she paid $1,500 in points to the lender. The amount of the OID on the loan is $1,500, which is the excess of the stated redemption price at maturity of $100,000 over the issue price of $98,500 (the amount borrowed of $100,000 minus the points paid of $1,500). Carol determines that the points (OID) she paid are de minimis based on the following computation.

Stated redemption price at maturity (principal amount

of the loan in this case) . . . . . . . . . . . . . . . . . . $100,000 Multiplied by: The term of the

loan in complete years . . . . . . . . . . . . . . . . . . . × 30 Multiplied by . . . . . . . . . . . . . . . . . . . . . . . . . . × 0.0025

De minimis amount . . . . . . . . . . . . . . . . . . . . . $ 7,500

The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Under the straight line method, she can deduct $50 each year for 30 years.

Constant-yield method. If the OID (including the points) isn’t de minimis, you must use the constant-yield method to figure how much you can deduct each year.

You figure your deduction for the first year in the following manner.

Determine the issue price of the loan. If you paid points on the loan, the issue price is generally the difference between the amount borrowed and the points.
Multiply the result in (1) by the yield to maturity (defined later).
Subtract any qualified stated interest payments (defined later) from the result in (2). This is the OID you can deduct in the first year.

Yield to maturity (YTM). This rate is generally shown in the literature you receive from your lender. If you don’t have this information, consult your lender or tax advisor. In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the issue price of the loan.

Qualified stated interest (QSI). In general, this is the stated interest that is unconditionally payable in cash or

6 Chapter 1 Rental Income and Expenses (If No Personal

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Publication 527 (2025)

property (other than another debt instrument of the borrower) at least annually over the term of the loan at a fixed rate.

Example—Year 1. The facts are the same as in the previous example. The YTM on Carol’s loan is 10.2467%, compounded annually.

She figured the amount of points (OID) she could deduct in 2025 as follows.

Amount borrowed . . . . . . . . . . . . . . . . . . . . . . $100,000 Minus: Points (OID) . . . . . . . . . . . . . . . . . . . . . - 1,500 Issue price of the loan . . . . . . . . . . . . . . . . . . . . $ 98,500 Multiplied by: YTM . . . . . . . . . . . . . . . . . . . . . . × 0.102467 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,093 Minus: QSI . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10,000

Points (OID) deductible in 2025 . . . . . . . . . . . . . $ 93

To figure your deduction in any subsequent year, you start with the adjusted issue price. To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Then, follow steps (2) and (3), earlier.

Example—Year 2. Carol figured the deduction for 2026 as follows.

Issue price . . . . . . . . . . . . . . . . . . . . . . . . . . . $98,500 Plus: Points (OID) deducted

in 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . + 93 Adjusted issue price . . . . . . . . . . . . . . . . . . . . . $98,593 Multiplied by: YTM . . . . . . . . . . . . . . . . . . . . . . × 0.102467 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,103 Minus: QSI . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10,000

Points (OID) deductible in 2026 . . . . . . . . . . . . . $ 103

Loan or mortgage ends. If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. However, if the refinancing is with the same lender, the remaining points (OID) generally aren’t deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan.

Points when loan refinance is more than the previous outstanding balance. When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally can’t be deducted as a rental expense.

Example. You refinanced a loan with a balance of $100,000. The amount of the new loan was $120,000. You used the additional $20,000 to purchase a car. The points allocable to the $20,000 would be treated as nondeductible personal interest.

Repairs and Improvements

Generally, an expense for repairing or maintaining your rental property may be deducted if you aren’t required to capitalize the expense.

Improvements. You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Table 1-1 shows examples of many improvements.

Betterments. Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.

Restoration. Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.

Adaptation. Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property.

De minimis safe harbor for tangible property. If you elect this de minimis safe harbor for your rental activity for the tax year, you aren’t required to capitalize the de minimis costs of acquiring or producing certain real and tangible personal property and may deduct these amounts as rental expenses on line 19 of Schedule E. For more information on electing and using the de minimis safe harbor for tangible property, see Tangible Property Regulations-Frequently Asked Questions .

Safe harbor for routine maintenance. If you determine that your cost was for an improvement to a building or equipment, you may still be able to deduct your cost under the routine maintenance safe harbor. See Tangible Property Regulations-Frequently Asked Questions for more information.

Separate the costs of repairs and improvements, and keep accurate records. You will need to know

The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property.

Publication 527 (2025) Chapter 1 Rental Income and Expenses (If No Personal

Use of Dwelling)