Renting Second Home, or Vacation Home

When you rent a second home or vacation Home you may or may not have to report rental income depending on how long the property is rented.

If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. The number of days of personal and rental use determines how you must report income and expenses of a residential unit in which you live part of a taxable year and rent or offer for rent for the days you do not live there.

Renting Second Home Fewer than 15 days

If you rent the unit for fewer than 15 days in the taxable year, you don’t have to include any rental income you receive. Also, you cannot deduct any expenses (depreciation and maintenance) as rental expenses. Interest is fully deductible if the home qualifies as a first or second home under the home mortgage interest rules.

The only deductions you are allowed when you rent for less than 15 days are those that you would be allowed as a homeowner (mortgage interest, real estate taxes, and casualty losses, if any).

Renting Second Home 15 days or more

If you rent the unit more than 15 days during the taxable year, you will include all your rental income in your income for the year. If rental use exceeds 15 days and your personal use exceeds the 14 day / 10% limit described in the example at the bottom of the page, the unit is treated as a residence rather than a rental property.

As mentioned above, when you rent out your home for part of the year at fair market value and also use it personally on some days during the year, expenses are allocated between personal and rental use. By law, deductible rental expenses are limited by this fraction:

Days of fair market rental
——————————————–
Total days of rental and personal use

The days a vacation home is held out for rent but not actually rented are NOT counted as rental days. The rules are simple and as follows:

      1. Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes.
      2. Any day that the unit is available for rent but not actually rented is not a day of rental use.

Renting second home example 1: Melanie owns a beach house on the Jersey shore that she rents from June 1 to August 31 (92 days). She uses the house during the last two weeks of May (14 days) as well. She was unable to find a renter for the 3rd week in July. The person that rented the house for August allowed Melanie to use it over a weekend (2 days) without any reduction or refund of rent. The house was not used at all before May 17 or after August 31. Melanie’s percentage is determined as follows:

      1. The beach house was used for a total of 85 days during the summer. The days it was available for rent but not rented (7 days) in July are not days of rental use. The August weekend (2 days) she used is rental use because she received a fair rental price for the weekend.
      2. Melanie used the beach house for personal purposes for 14 days in May (the last two weeks).
      3. The total use of the beach house was 99 days (14 days personal use + 85 days rental use).
      4. Melanie’s rental expenses are 85/99, or 86%, of the beach house expenses.

14-day / 10% Personal Use Test

Using the above example, assume that during the 2 days in August that Melanie used her rental beach house, she didn’t receive rent for those days. Her personal use of the house increases from 14 to 16 days and the rental days decrease from 85 to 83. Because she used the beach house for personal purposes for more than 14 days and more than 10% (16/83 = 19%) of the days of rental use, her use now qualifies as a home and not a rental. If she has a net loss, she will not be able to deduct all her rental expenses. She can carry them forward and deduct them against her rental income next year.

This rule is known as the “14 day/10% test”. It limits your deductions to rental income. Under this rule you are considered to have used the unit as a residence if your personal use days during the year exceeded 14 days, or, if greater, 10% of the days on which the unit was rented to others at a fair market rental price. When the house is treated as residence, rental expenses are deductible only to the extent of rental income. Thus, losses are not allowed.

Expenses not deductible in the current year under this limitation may be carried forward and will be deductible up to rental income in the following year. The deduction limit is irrelevant if your rental income exceeds expenses.

Note that when determining days of use, any day that you spend working substantially full time repairing and maintaining your property is not counted as a day of personal use. You also don’t have to count such a day as a day of personal use even if family members use the property for recreational purposes on the same day.

Renting second home example 2: Ricardo owns a cabin in Lake Tahoe that he rents during the summer. He spends 3 days at the cabin each May working full time to repair anything that was damaged over the winter and get the cabin ready for summer. He also spends 3 days each September working full time to repair any damage done by renters and getting the cabin ready for the winter. These 6 days do not count as days of personal use even if his family uses the cabin while he repairs it.

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