To calculate vacancy loss on a rental property, subtract what you actually collect from your potential gross income over a defined period. The difference is your total vacancy and credit loss, and it has two components: physical vacancy (units sitting empty) and economic vacancy (occupied units that underperform because of unpaid rent, concessions, or non-revenue use). Run each piece separately so you know what’s driving the shortfall, then combine them for the total.
Gather the Inputs First
Every vacancy calculation starts with potential gross income, sometimes called potential gross rent. This is the maximum revenue the property would produce if every unit were leased at full market rent for the entire period, with every tenant paying on time. Build the figure from two sources: your current rent roll, which shows what each unit is actually leased for, and a market survey of comparable properties, which tells you whether those lease rates still reflect what similar units command. If your rent roll shows a two-bedroom at $1,400 but comparable units nearby lease for $1,550, the market rate is what belongs in the potential gross income line.
Fix a time frame before you calculate anything. Most investors use a twelve-month period aligned with their fiscal year, but monthly calculations work for tracking trends. The important thing is applying the same window to every input: potential income, actual collections, vacant days, and concessions all need to cover the identical period. Keep lease agreements, bank deposit records, and collection logs organized, because the IRS requires landlords to maintain records that support the income and expenses reported on their returns, including receipts and bank statements that substantiate each item.1Internal Revenue Service. Tips on Rental Real Estate Income, Deductions and Recordkeeping
For a reference point, the U.S. Census Bureau reported a national rental vacancy rate of 7.2 percent for the fourth quarter of 2025.2U.S. Census Bureau. Housing Vacancies and Homeownership – Press Release Rates vary widely by property type, location, and asset class. Lenders underwriting multifamily loans often apply a stabilized vacancy factor of 5 to 7 percent regardless of a property’s current occupancy, because they want to model long-run performance rather than a single quarter.
Physical Vacancy: The Formula
Physical vacancy is the simplest form of lost income. A unit sits empty, and no rent comes in. The calculation tracks how many days each unit was unoccupied during the measurement period, then converts that into a percentage and a dollar amount.
Start by counting total available unit-days. A ten-unit property over a thirty-day month has 300 available unit-days (10 units × 30 days). Next, count how many of those days had no tenant. If one unit was vacant the entire month, that’s 30 vacant days. Divide vacant days by available days to get the physical vacancy rate:
30 vacant days ÷ 300 available days = 10% physical vacancy rate
To convert that rate into dollars, multiply it by the potential gross rent for the period. If the monthly potential rent across all ten units totals $15,000:
$15,000 × 10% = $1,500 physical vacancy loss
That $1,500 is income that never existed because no one occupied the space. Each vacant unit-day carries a cost. The gap between one tenant moving out and the next moving in typically runs 7 to 30 days depending on the condition of the unit and local market demand, so turnover speed feeds directly into this number.
Economic Vacancy: The Formula
Economic vacancy captures revenue shortfalls that a physical headcount misses entirely. A unit can be occupied and still contribute zero income, or it can be occupied by a tenant paying less than the full lease amount. Three categories usually drive it:
- Bad debt, where a tenant lives in the unit but doesn’t pay rent or pays only part of it. The space isn’t vacant, but the income isn’t arriving.
- Non-revenue units, including model apartments used for tours, units occupied by on-site staff as part of their compensation, and spaces converted to offices or storage.
- Concessions, meaning free months of rent, move-in credits, and recurring discounts that reduce what you actually collect below the stated lease rate.
The formula subtracts actual collections from potential gross income. If your ten-unit property has a monthly potential of $20,000 but you only deposit $17,000, your economic vacancy loss is $3,000. Divide that by the potential to get the rate:
$3,000 ÷ $20,000 = 15% economic vacancy rate
This 15 percent includes every dollar that didn’t arrive, regardless of the reason. A property can show 100 percent physical occupancy and still have double-digit economic vacancy if tenants aren’t paying or if concessions are heavy.
Track Concessions Separately
Concessions are easy to lose sight of because they often appear as one-time credits on a move-in ledger rather than a monthly line item. They add up. If you offered three new tenants a $1,200 move-in credit each over the course of a year, that’s $3,600 in revenue you won’t see. A property with $5,000 in physical vacancy loss and $3,600 in concession-related loss is actually $8,600 below its potential, and the concession portion stays invisible if you only track occupied versus empty units.
Keep concessions in a separate ledger column so they don’t get buried in your rent roll. When concessions climb, it usually signals that either asking rents are above market or the property has a competitive disadvantage tenants need to be compensated for.
Bad Debt Is Its Own Problem
Bad debt is the most frustrating component of economic vacancy because the unit is occupied but the income isn’t arriving, and the eviction process to recover the space can take anywhere from a few weeks to several months depending on the jurisdiction. During that stretch, the unit generates zero revenue while the mortgage, insurance, and taxes still get paid. Tightening screening to verify current income and rental payment history before signing a lease is the most effective way to keep bad debt low. Once a tenant stops paying, recovery options shrink fast.
What the Number Feeds Into
Vacancy and credit loss isn’t a standalone metric. It’s the bridge between what a property could earn and what it will realistically produce. The standard income waterfall in real estate looks like this:
Potential Gross Income − Vacancy and Credit Loss = Effective Gross Income
Effective gross income (EGI) is the starting point for every meaningful financial calculation that follows. Subtract operating expenses from EGI to get net operating income (NOI), and NOI drives property value, debt coverage ratios, and investor returns.
Property value under the direct capitalization method equals NOI divided by the market cap rate. Every dollar of vacancy loss reduces NOI dollar-for-dollar, and the impact on value is magnified by the cap rate. On a property trading at a 6 percent cap rate, each additional $1,000 of annual vacancy loss cuts roughly $16,700 in property value ($1,000 ÷ 0.06). At a 5 percent cap, the same $1,000 wipes out $20,000. Small vacancy improvements produce outsized value gains.
What You Can and Can’t Deduct
You cannot deduct the dollar value of lost rent for periods when a unit sits vacant. The IRS is explicit: while you may deduct ordinary and necessary expenses for managing or maintaining the property during a vacancy, the rental income you didn’t receive is not deductible.3Internal Revenue Service. Publication 527 (2025), Residential Rental Property Property taxes, insurance, maintenance, and depreciation remain deductible while the unit is empty, but you can’t write off $1,500 because a unit sat vacant for a month.
On your tax return, rental income and expenses flow through Schedule E (Form 1040). There’s no specific line for vacancy loss. Lower collections simply mean less income reported on Line 3, which reduces taxable rental income naturally.4Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040)
How you handle uncollected rent depends on your accounting method. Most individual landlords use the cash method, which means you report income only when you actually receive it. If a tenant doesn’t pay, you never included that money in your income, so there’s nothing to deduct. You can’t claim a bad debt deduction for rent you never reported as earned.3Internal Revenue Service. Publication 527 (2025), Residential Rental Property
Accrual-method landlords have a different situation. Under accrual accounting, income gets reported when it’s earned (billed), regardless of when payment arrives. If you included a tenant’s unpaid rent in income under the accrual method but later can’t collect it, you may be able to deduct that amount as a business bad debt.5Internal Revenue Service. Topic No. 453, Bad Debt Deduction Most residential landlords are cash-basis taxpayers, so bad debt deductions for unpaid rent rarely apply in practice.