When you own a second home such as a beach house, ski cabin, or other property and you both rent it and use it for personal use, the vacation home rules limit the deductions you can take for your rental expenses.
If your property qualifies as a “residence,” you face the strictest limits of the vacation home rules. Your property is a “residence” if you use the rental property for personal use for more than the greater of
- 14 days in the year or
- 10 percent of the days during the year in which you rent the unit at a fair rental price.
When tax law makes your rental/personal home a residence, the vacation home rules divide your home so that you have to treat it as a residence for part of the year and a rental property for part of the year.
This hurts for two reasons:
- The IRS limits your deductible rental expenses to rental income (any excess is lost).
- The IRS treats some of your mortgage interest and property tax deductions as rental expenses (subject to the cap on rental expenses), which reduces the purely rental expenses you could otherwise deduct, such as maintenance and depreciation.
The good news is that we have a tax reduction technique that was approved by the Tax Court, as well as by the Courts of Appeal in the Ninth and Tenth Circuits, that could apply to your vacation home.