Taxable Vacation Home Rental Income (tax-free vacation home, Personal and rental use calculation)
This particular article of the Property Rental Tax Guide focuses on the special rules involved when you use property both for personal and rental use. This may be either because you are renting out a room in the same house that you live in, or if you have a vacation home that you may personally use a few weeks out of the year and rent the rest of the time. If you do not use your rental property for personal purposes at all, this article is inapplicable to you.
Property rented for less than fifteen days. If you rented your property for less than fifteen days total during the year, you do not need to report any of your rental income. Treat the property as personal, and deduct all of your expenses as personal expenses, usually on Schedule A of Form 1040.
Renting a Vacation Home
Personal use test. The personal use test is a numeric calculation that measures the total number of days you used your rental property personally. Whether the personal use test is satisfied has a bearing on how you may deduct your rental expenses. To calculate the person use test, you must first figure the number of days in the year you actually rented the property for fair market value. Multiply that number by 10%. We will call the result the “total days rented,” or “TDR” for short. Next, figure out the number of days you used the rental property for personal use. We will call this “personal use days,” or “PUD” for short. See the chart below.
NOTE: “Personal use” includes use by you, any other owners of the property, and the families of all owners of the property, unless the family member is paying rent at fair market value.
|If TDR is…||and PUD is…||then the personal use test is…|
|over 14||less than TDR||not satisfied|
|under 14||less than 14||not satisfied|
|over 14||more than TDR||satisfied|
|under 14||more than 14||satisfied|
If test is satisfied. If the personal use test is satisfied, you may deduct your rental expenses only to the extent of your rental income. This means that you cannot have a net rental loss. Any excess expenses not deducted carry forward to future years and will be used if there is sufficient rental income in that year.
If test is not satisfied. If the personal use test is not satisfied, your rental expenses are not limited by your rental income. You may deduct all of your rental expenses and have a net rental loss. However, your rental loss deduction may still be limited by certain passive activity rules. See the article titled Tax Deductible Rental Losses, included in this Guide, for more information.
How to figure rental expenses. Expenses incurred regardless of personal or rental use (such as mortgage interest or real estate taxes) must be allocated between personal and rental use. Figure out the total number of personal use days. Then, figure out the total number of days you actually rented the property for fair market value. Then, divide rental days by the sum of personal days and rental days. The result will be your rental percentage. Multiply expenses by this percentage to arrive at the rental deductible portion.
Renting a Part of Your Home
If you rent a part of the home you live in, you must allocate your expenses between rental and personal. The IRS allows some flexibility with the method you use; just make sure it is consistent from year to year. One option is to divide the number of rooms you are renting with the total number of rooms in the home. Another is to divide the number of square feet you are renting by the total number of square feet in the home. The expenses allocable to the rental are deducted as rental expenses; the rest is deducted as a personal expense on Schedule A of Form 1040.