Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
Vacation homes are a great benefit to those who can afford to own them. They offer a place to stay when you need to get out of town, and they can be a source of income for the rest of the year. However, the tax code has some special rules to keep vacation owners from receiving an extra tax benefit on a property that is used for personal enjoyment.
When is a vacation home affected by the rules?
Vacation rental home expenses are subject to limitations if the personal use of the home is the larger amount of the following items:
- 14 days, or
- 10% of the total days the home was rented at fair market value
For example, if you use your vacation home for 14 days and the home is rented for 130 days, you will have some of your rental expenses limited. Conversely, if the rental home was rented 220 days and you use it for vacation for 20 days, your rental expenses will not be limited because the home was used for personal purposes less than 10% of the total days the home was rented.
How are expenses limited?
If you are subject to limitations, your vacation rental expenses need to be allocated based on the percentage of rental use. The percentage is calculated by dividing the days the property was rented by the total days during the year in which the property was used as a rental and for personal purposes. For example, if you rented your vacation home for 95 days and personal days were 20, then your allocated business percentage is 82.6% (95/115). Then the percentage is applied to the following expenses:
- Cleaning and Maintenance
- Insurance
- Mortgage Interest Paid to Banks
- Repairs
- Supplies
- Real Estate Taxes
- Utilities
- Other Interest Paid
- Depreciation
Additional considerations
There is one other vacation rental rule that could influence your property. Under passive activity rules, a rental activity isn’t a passive activity if the average length of stay per renter is 7 days or less. Therefore, if your property is rented for more than 14 days and the average rental period is 7 days or less, you may need to report the income from your rental property on Schedule C instead.
Use a comprehensive tax software
When you have a rental property, there are many calculations which need to be performed, like the allocation of vacation rental expenses. We recommend you use tax software to make sure your tax return is accurate. FreeTaxUSA supports rental income and will allocate expenses correctly when you rent a vacation property.
