Travis H. Long, CPA, Inc. Blog

Originally published in the Cedar Street Times

August 24, 2012

Two weeks ago I explained that any personal use of a vacation home you claim as a rental property on your tax returns would have some negative tax ramifications.  Your homework was to count the days of personal use (as defined in my prior article – very important) and the days actually rented, and this week I would tell you what it means.  Here we go!

If your personal use exceeded the greater of 14 days or 10 percent of days rented at fair market value during the year, your property is considered a personal residence.  Your first tax hurdle is prorating the expenses based on personal use and days rented.  Generally speaking, unless the expense is directly related to the renter’s stay (such as the clean-up fee after a renter leaves), you must divide the number of days of personal use by the sum of the number of days of personal use plus days actually rented, and then multiply the expenses by that ratio.  That portion will be disallowed as a personal expense and will be nondeductible.  (Note, it is not days of personal use divided by 365 days.)  So if you use the property for 30 days and you only rent it for 60 days, 1/3 of the expense will be disallowed (30/ (30+60) = 33 1/3 percent.  Furthermore, your expenses will be capped at the amount of gross income generated by the property, with the exception of the real estate taxes and mortgage interest.  The personal use portion of the taxes and interest will often be allowable as an itemized deduction on Schedule A.  Qualifying expenses in excess of the cap, can be carried forward to the following year.

If your personal use was less than the greater of 14 days or 10 percent of days rented at fair market value, then it is the same as the above, except your expenses are not capped at the gross income generated by the property.  Note that you still have to prorate your expenses and disallow a portion for personal use.  Even if you use the property for one day, part of the expenses will be disallowed.

If your personal use was more than 14 days and you rented it for 14 days or less, you do not declare the income on your tax returns.  You also do not declare expenses except for taxes and interest that may be deductible on Schedule A.  (You may hear of people renting out their home for a golf tournament and paying no tax on the income – this is how they do it.)

The point of these rules is simply that the IRS does not want people taking tax write-offs related to the personal use of a vacation home.  The rules are strict and defined because of the potential abuse.  You can imagine the IRS’ view when they perceive someone with a luxury second home in a vacation destination used frequently by the owners and their friends for free, rented at $20 a night to some acquaintances to cover the cleaning fee, and then only rented out at fair market rates a few weekends of the year, all the while trying to write the entire activity off as a tax deduction!  It is not a business venture in that light.  So if you want to maximize your deductions, limit your personal use and maximize days rented, or simply eliminate your personal use.  There are additional rules beyond the scope of this article, but these are the big ideas to understand.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.