Own a Vacation Home? Adjusting Rental vs. Personal Use Might Save Taxes

If you own a vacation home that you both rent out and use personally, it’s a good time to review the potential tax consequences: If you rent it out for less than 15 days: You don’t have to report the income. But expenses associated with the rental (such as advertising and cleaning) won’t be deductible. If you rent it out for 15 days or more: You must report the income. The expenses you can deduct depend on how the home is classified for tax purposes, based on the amount of personal vs. rental use:

• Rental property. If you (or your immediate family) use the home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules. You can’t deduct any interest attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.


• Non-rental property. If you (or your immediate family) use the home for more than 14 days or 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a personal residence, but you will still have to report the rental income. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property tax.

Look at the use of your vacation home year-to-date to project how it will be classified for tax purposes. Adjusting the number of days you rent it out and/or use it personally between now and year end might allow the home to be classified in a more beneficial way. For assistance with vacation homes or rental properties, please contact us. We’d be pleased to help. © 2017

Common Questions

What's the difference between a rental property and a vacation home for tax purposes?

A pure rental property is rented to tenants 100% of the time and never used personally. All expenses (mortgage interest, property tax, insurance, repairs, depreciation) are deductible against rental income on Schedule E. A vacation home is one you use personally for part of the year and may rent for part of the year. The tax treatment depends on how many days you use it personally versus rent it out. The IRS rules around the 14-day test determine whether it counts as a rental, a personal residence, or a mixed-use property.

How many days can I personally use a vacation home before losing rental tax benefits?

The IRS uses a specific test. If you rent the home out for fewer than 15 days in a year, you don't have to report the rental income at all, but you also can't deduct rental expenses. If you rent it out for 15 days or more, and use it personally for the greater of 14 days or 10% of the rental days, it's classified as a personal residence (mixed-use), and rental expense deductions are limited to rental income. If you use it personally for less than 14 days or less than 10% of rental days, it counts as a true rental and full expense deductions apply.

Can I deduct expenses on a vacation home I use part of the year?

Yes, but the amount depends on your personal use. You allocate expenses between rental and personal use based on days of each. Rental days get rental expense treatment on Schedule E. Personal use days don't get any deduction (except mortgage interest and property tax on Schedule A, subject to the SALT cap). The math gets complicated when you mix repairs that benefit both rental and personal periods, which is why most vacation home owners with rental activity work with a CPA to make sure the allocations hold up.

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