Tax Deduction for Rental of Vacation Home

Congress set deduction limits on vacation home property to prevent taxpayers from converting non-deductible personal expenses into deductible business expenses. Generally, expenses that are attributable to personal use are not tax deductible, and expenses that are attributable to business use are tax deductible.

To illustrate, say a taxpayer owns a vacation home. He uses the residence occasionally throughout the year but during the months of June, July, and August, he fully rents it. Ten percent of the summer months amounts to 92 days or 9.2 percent. The taxpayer can deduct attributable expenses provided that he uses it no more than 14 days out of the year because 14 is the larger number.

How to Determine Personal Use

A day of personal use is a taxpayer’s use of any part of the unit for all or any part of the day. Using a vacation home for just a few hours to host a dinner, for example, is considered a day of personal use.

Using Airbnb to rent a room of the vacation home to another person while the owner remains present is considered a day of personal use, too. Even though a third party is renting that room at fair market value, the owner’s use of part of the vacation home gives it personal use status.

Moreover, personal use includes use by a co-owner, family member, a third party under an arrangement that permits the taxpayer to use some other unit, and a renter who pays less than fair market value. Swapping vacation homes with another party is also considered personal use.

Days set aside for repairs and maintenance do not count as personal or business use.

How to Calculate Deductible Expenses

A taxpayer can deduct only the time that he used the home for business. If the taxpayer rented the home for 90 days (business use) and lived in the house for 10 days (personal use), 90 percent of attributable expenses can be deducted as a business expense.

When deducting expenses for a rental property, the tax code requires the following order:

1. deduct mortgage interest and real estate taxes;
2. deduct operating expenses;
3. deduct depreciation.

For example, assume the following expenses are incurred over one year:

• Mortgage interest and real estate taxes: $25,000
• Repairs, utilities, and association fees: $12,000
• Depreciation: $8,000

Using the previous numbers of 90 days of rental and 10 days of personal use, $40,500, or 90 percent of the total $45,000, is tax deductible.

Be aware that these deductions are considered passive deductions and may generally be deducted only against passive income. The IRS defines passive income as earnings derived from a rental property or another business that does not require direct involvement from the taxpayer. Thus, deductible expenses attributable to a vacation home can only be deducted from earnings derived from non-active income.

If you own a vacation home and use it primarily as a rental property, you may be able to deduct expenses. Your personal circumstances will dictate if and how much you may deduct.