Contributed by: TriciaD, FreeTaxUSA Agent
Managing taxes for rental properties that you also personally use can be tricky. As a vacation home or rental property owner, different from your main residence, it’s important to know how rental days versus personal use days affect your tax return. This understanding impacts potential expense deductions and could reduce your taxable income.
What are rental days?
Rental days are days your property is rented at a fair rental price to generate income, without any personal use of the property. Fair rental price refers to rent someone unrelated to you would pay. These days are important for determining allowable tax deductions.
For example, if you rent out your vacation home for 180 days in a year at a fair rental price, the 180 days will be considered rental days. Accurate records will need to be kept for the days rented, including rental agreements, payment records, and any communication with tenants. Criteria for rental days include:
- The property must be rented at fair rental price.
- There shouldn’t be significant personal use of the property during the rental period.
- Rental days must be genuine, with clear intention of generating income.
What are personal use days?
Personal use days refer to instances when you (the owner), your family, or anyone paying below fair rental price utilizes the property for personal reasons. Personal use days include:
- The owner, family members, friends, or others that use the property for personal activities.
- The property is used by individuals paying less than fair rental price.
- You gain significant personal benefit from using the property.
For example, imagine you own a beach house and rent it through Vrbo or Airbnb at fair rental price for most of the year. During the summer, you decide to use it for a vacation with friends and family for 14 days. You also let your close friend stay there for two months (60 days), charging them a small fee for cleaning, which is below the price you would charge a Vrbo or Airbnb renter. 74 days (14 for the friend and family vacation and 60 days for the friend) is considered personal use days.
Reporting days you use a property personally versus when it's rented affects deductible expenses on your tax return. Misclassifying personal use days can lead to IRS involvement and/or penalties.
What if I live at the property during the year?
The IRS has specific regulations for situations where a property is both a personal residence and a rental. If you live in multiple homes, including your vacation home, the rental status can vary. A property is considered a residence if you use it for personal purposes during the tax year for more than the greater of:
- 14 days, or
- 10% of the total days you rent it to others at a fair rental price.
For instance, living in your primary home for 11 months makes it your main residence. If you stay in your vacation home for the other 30 days, it’s also considered a residence unless it’s rented out for over 300 days during the year at a fair rental price.
If your main residence is rented for fewer than 15 days within the tax year, you do not report the rental income, and expenses aren’t deductible.
What tax deductions are available and how are they split between personal use and rental days?
When a rental property is also used for personal purposes, the IRS limits expenses that can be deducted from rental income. Deductions are allowed only for expenses during the rental period and must be allocated to the number of rental days used versus the total number of days the property is used, including personal use days.
If the property is mostly used as a rental, you can deduct expenses like mortgage interest, property taxes, maintenance, utilities, insurance, and depreciation, which will reduce the amount of rental income subject to tax. On the other hand, if the property is also used personally, the IRS limits deductions by splitting expenses between rental and personal use. Costs for personal use aren’t deductible as rental expenses.
Continuing with the earlier example of personal use days, besides the 74 days used personally, the beach house was also rented out to Vrbo and Airbnb customers for 180 days. Only expenses for these rental days are deductible. The deductible expenses would be prorated as follows:
- Total days of use: 254 days (74 personal days + 180 rental days)
- Rental use percentage: 71% (180/254)
- If total expenses are $10,000, the deductible portion for rental use would be: $7,100 (71% of $10,000)
This example highlights the importance of accurately tracking and reporting personal use days. FreeTaxUSA makes it easy by asking for the number of personal and rental days. Once entered, the software calculates the deductible rental expenses automatically.
Here are some guidelines for maintaining thorough records of rental days, personal use days, and related expenses:
- Use a separate calendar for tracking rental and personal days.
- Keep all rental agreements and payment receipts.
- Document any maintenance or property improvements.
To report rental income in FreeTaxUSA, follow this menu path: Income > Business Income > Rental Income (Schedule E). For properties used for both rental and personal purposes, provide the details and specify the number of days for each type of use. To do so, answer “Yes” to “Did you or your family use this rental during (year) for personal purposes?” on the “Tell us about your rental property” page.
After selecting "Save and Continue," the next page will prompt you to enter personal use details and the number of days rented to others, as shown in this example:
Accurately reporting rental income and personal use days is crucial for compliance and maximizing deductible expenses. FreeTaxUSA makes this process easier by helping you enter detailed rental and personal use information and automatically determining the eligible deductions.
Always maintain thorough records of rental agreements, payments, and any property maintenance or improvements to support your tax filings. Using separate calendars for rental and personal days ensures precise tracking, ultimately helping you to meet requirements and optimize your tax benefits.
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