Rules and Deductions for Vacation Rentals

Do you own a vacation home that you occasionally or regularly rent out to others?  It’s not uncommon for individuals to purchase vacation properties for personal use and to rent out the home part of the time to help offset the costs.  The following are common questions asked about vacation rentals:

1) How often do I have to rent out my property to receive tax deductions on the rental expenses?

To receive the tax benefits of a rental property, you must advertise the property for rent, be preparing the property for rent, or have it rented for fair market value at least 15 days in a calendar year.

2) What if I stay in the home a portion of the year?

If you personally use the property, in addition to renting it out to others, then special rules apply for how expenses can be applied as deductions, or written-off, on your return.  Expenses must be divided between rental use and personal use.  This means that only a portion of the expense will be applicable as a deduction on the rental income.  How the costs are divided is determined by comparing the total number of rental days versus personal use days.

3) What is the minimum number of days my property must be occupied by renters for it to be considered a rental property? 

Properties must be rented for at least 15 days in a calendar year to be considered a rental property.  If a property is rented for less than 15 days, rental income does not have to be reported and rental expenses cannot be deducted.

4) What if I rent the home to friends or family at a discounted rate?

If you are renting the property to anyone at a rate that is less than a fair rental price, the time of that rental is considered personal use and therefore cannot be counted towards total rented days in a calendar year.  What about the rental fees received from these discounted rentals?  You do not have to claim the fees received, but you cannot deduct any expenses associated with the rental in question.  These types of transactions are called Personal Use Transactions.

5) I don’t rent out my property enough for it to be considered a “rental property.”  Are there any deductions available to me?

If you do not rent your property enough for it to be considered “rental property” for tax purposes, you do not have to report the rental income, but you also cannot deduct rental expenses.  However, you may still deduct mortgage interest, property taxes, and casualty losses.

 

Resources:

(1) “Plan Ahead for Tax Time When Renting Out Residential or Vacation Property.

(2) “What to Expect at Tax Time if You Rent Out Your Vacation Home.