Can an LLC Write Off Property Taxes and Mortgage Interest Before a Rental is Available?

The deductibility of property taxes and mortgage interest depends on whether the property is considered placed in service (available for rent) under IRS rules. Here are the options.

Real estate investors often form LLC holding companies to acquire and manage rental properties. One of the most common tax questions that comes up is:

“If my LLC pays property taxes and mortgage interest while the property is not yet available for rent, can I deduct these expenses?”

The answer depends on how the IRS classifies the property’s status—specifically, whether it has been placed in service.

1. Understanding “Placed in Service”

The IRS considers a rental property placed in service when it is ready and available for rent, even if no tenant has signed a lease.

• Example: If you list the property on Zillow, put up a “For Rent” sign, or begin advertising in November, the property is placed in service as of that date.

• From that point forward, ordinary rental expenses (mortgage interest, property taxes, utilities, insurance, depreciation) are deductible against rental income.

  
  

2. Before the Property Is Available

If the property is not yet available for rent (for example, during renovations or while waiting for permits), the rules change:

• Mortgage Interest:

  • Must generally be capitalized into the property’s basis until the property is placed in service.

  • Exception: If you’re holding the property strictly as an investment (not yet in a rental business), it may be treated as investment interest expense, which is deductible only against investment income.

• Property Taxes:

  • Before the property is available for rent, these also typically get capitalized into the property’s cost basis instead of being deducted currently.

  • This increases your basis and reduces taxable gain when you sell.

    
    

3. Start-Up and Pre-Opening Costs

Some expenses paid before your rental activity begins may qualify as start-up costs under IRC §195.

• Up to $5,000 can be deducted in the first year.

• The remainder must be amortized over 15 years.

⚠️ However, mortgage interest and property taxes generally do not qualify as start-up costs—they follow the capitalization rules above.

4. Alternative: Held as an Investment Property

If your LLC holds the property as a long-term investment (without starting rental activity):

• Mortgage interest = investment interest expense (deductible only against investment income).

• Property taxes = subject to the $10,000 SALT cap for individuals. An entity taxed as a corporation may deduct fully.

This approach is less favorable than placing the property in service quickly.

5. Strategic Takeaways for LLC Owners

• Document your placed-in-service date. Keep evidence like ads, MLS listings, or rental signs.

• Capitalize until then. Expenses before the placed-in-service date increase your basis but are not deductible in the current year.

• Deduct once available. As soon as the property is listed or advertised, taxes, interest, and other costs become deductible rental expenses.

• Consider entity structure. An LLC taxed as a partnership or corporation may avoid some of the individual-level limitations (like the SALT cap).

  
  

✅ Bottom Line: Your LLC cannot deduct mortgage interest and property taxes while the property is not available for rent. These costs generally must be capitalized into the property’s basis. Once the property is placed in service—meaning ready and available for rent—all ongoing expenses become deductible.

Be sure to reach out to your tax advisor for in-person professional advice.

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