A vacation home that generates income and provides a place for your vacation can be a great investment. You have the flexibility to escape the real world and stay at the home whenever you choose, and you can use the rental income earned to offset expenses that come with owning the property. However, complicated tax laws can sometimes cause taxpayers to avoid taking advantage of a rental transaction. If you are considering renting out your vacation home, this guide will set you up for smooth sailing.
Vacation Rental Tax Rules: How the Number of Days Impacts Your Taxes
Before you can calculate and report rental activity on a Form 1040, you must first look at the number of days the property was rented versus the number of personal use days.
14-Day Rule for Vacation Rentals (When Rental Income Is Tax-Free)
If the property is rented for 14 days or fewer during the year, any revenue earned is not reported on the tax return, which means rental expenses are not deductible. However, mortgage interest and property taxes can still be included on Schedule A as Itemized Deductions, subject to the usual limitations with respect to those deductions.
How Vacation Rental Expenses Are Calculated and Deducted
Personal Use Under 14 Days or 10%: How to Allocate Rental Expenses
If personal use is no more than 14 days or 10% of the number of days rented, the challenge is determining which expenses are from rental activity and which are from personal use. To start, the taxpayer will calculate the ratio of rental days to total days of use. Note that rental days are the actual days the property was rented, not the amount of days the property was available to be rented. Then, multiply this percentage of rental days by each expense to determine the amount reportable as “rental expenses.”
For example, if a taxpayer personally used their vacation home for 15 days and rented it for 160 days, the taxpayer will divide 160 days by 175 days (160 days rented + 15 days of personal use), which results in roughly 91% of total expenses being reportable as “rental expenses.” The taxpayer will then multiply the percentage by each expense and report the amounts on Schedule E.
What happens to the other expenses that are allocated as personal expenses (9% of expenses in the example)? Unfortunately, because those expenses are attributable to personal use, they are not deductible on the tax return. However, there is an exception. If you itemize deductions instead of using the standard deduction, you may still be able deduct the remaining mortgage interest and property taxes on Schedule A, subject to the limitations regarding those Schedule A deductions.
One benefit of a rental falling under this category is if there are more rental expenses than income, the taxpayer may be allowed to offset some of that additional expense with other income reported on Form 1040, subject to the passive loss limitation rules.
Personal Use Over 14 Days or 10%: Limits on Rental Deductions
If personal use is more than 14 days or 10% of the number of days rented (whichever is greater), tax treatment of rental expenses depends on how much rental income was earned compared to the amount of rental expenses.
If you earned more rental income than expenses, the amount of rental expenses will be calculated and reported on Schedule E in the same manner as mentioned above when personal use is 14 days or less.
However, if expenses are greater than rental income, the process becomes more complicated. In this situation, rental expenses are reported in a specific order. Note: while allocating rental expenses, keep in mind that total rental expenses cannot be greater than rental income. You should first figure out the rental portion of each expense as described in the section above. Then, rental expenses will be deducted in the following order until rental income is offset:
- Rental portion of mortgage interest.
- Rental portion of property taxes.
- Rental portion of deductible casualty and theft losses.
- Rental expenses directly associated with the property itself including advertising, legal fees, commissions and office supplies.
- Rental portion of expenses related to operating or maintaining the property such as repairs, insurance and utilities.
- Rental portion of depreciation expense of the property along with any improvements and furniture.
Essentially, you will make your way down the list until rental income is netted with rental expenses to equal zero.
Once again, mortgage interest and property taxes allocated to personal use and not reported as rental expenses can be reported on Schedule A with Itemized Deductions, subject to limitation.
What Counts as a Personal Use Day for Tax Purposes?
In its simplest form, a personal use day is a day in which a taxpayer uses his or her vacation home for pleasure (not performing maintenance) without paying fair market rent. There are a couple of rules you should consider before declaring a certain day as either personal or rental.
Rule #1: Fair Rental Price and Personal Use Classification
Fair rental price is the price a person who has no association with the property owner would be willing to pay to stay at a vacation home. The price charged would not be considered fair if it is substantially less than what is charged for other homes in the area with similar characteristics (such as number of bedrooms/bathrooms, a pool, etc.). If, for example, the property owner or a family member stays at the home rent free, those days are considered personal use for calculating rental expenses.
Rule #2: Why Maintenance Days Don’t Count as Personal Use
In the event that the property owner visits the home in order to perform routine maintenance and repairs, such days are neither personal nor rental. Even if family members and friends visit the property rent free on these days, they are still not considered personal use days, as long as the primary reason for the visit was for maintenance. It is highly recommended that you keep logs, receipts, etc. in order to document the maintenance days.
Vacation Rental Tax Tips to Maximize Deductions and Reduce Tax Liability
It is important to note that these rules do not apply to just condos, houses and cabins, but also include RVs and boats as long as there are sleeping, cooking and bathroom facilities. These rules can get complicated quickly, so it is recommended that you consult your tax advisor early to make certain you are not skipping an eligible deduction or being forced to pass up a deduction due to a missed detail in the rules.
By tracking details and keeping logs and receipts, you can ensure you maximize your tax benefit. Who knows – you might even be able to make some money while you are at it!
The rules around vacation rental taxes aren’t always straightforward, and getting them wrong can be costly. A proactive approach can help you protect your income and maximize available deductions.
Don’t leave it to chance. Start building a smarter tax strategy with our tax planning guide for individuals.
Content provided by Amanda Hensley, Senior Tax Manager in the LBMC Knoxville office. The tax professionals at LBMC can help minimize the tax burden and provide crucial information on an ongoing basis to assist in day-to-day operations.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.
Frequently Asked Questions About Vacation Home Rentals
Do I have to report vacation rental income if I only rent the property a few days a year?
If you rent your vacation home for 14 days or fewer during the year, you generally do not report the rental income on your tax return, and you cannot deduct rental expenses for those days. Mortgage interest and property taxes may still be deductible on Schedule A, subject to current limitations.
How do I count personal use days vs. rental days?
Rental days are only the days the property is actually rented to others at a fair rental price. Personal use days are days you or certain related parties use the property without paying fair market rent, or pay less than a fair rental price. Days spent primarily on repairs and maintenance generally do not count as personal use days if you document the work performed.
What happens if I use my vacation home a lot and it shows a loss?
If personal use exceeds 14 days or 10% of the days rented (whichever is greater), your ability to deduct a loss is limited. Rental expenses are taken in a specific order and cannot exceed rental income, so you may not be able to deduct all expenses in the current year.
Can I still deduct mortgage interest and property taxes I allocate to personal use?
Yes, in many cases the personal‑use share of mortgage interest and property taxes may still be deductible as itemized deductions on Schedule A, subject to current rules and any applicable limits on home mortgage interest and state and local tax deductions.
Does it matter if I rent my vacation home through Airbnb, Vrbo, or another platform?
The core tax rules—14‑day rule, personal‑use tests, and allocation of expenses—apply regardless of whether you rent directly to guests or through an online platform. Using a platform may add reporting considerations (for example, information returns you receive), but it does not change the underlying vacation‑home rules.
Are RVs and boats treated the same as a house or condo?
Yes, as long as the property has sleeping, cooking, and bathroom facilities, it is generally treated as a dwelling unit for these vacation home rules, whether it is a house, condo, cabin, RV, or boat.
What records should I keep for my vacation rental?
You should track the number of days the property is rented at fair rental, the number of personal‑use days, days used primarily for repairs and maintenance, all income received, and all expenses by category. Keeping a log, calendar, and receipts will make it much easier to correctly apply the rules and support your position if questioned.
When should I talk to a tax advisor about my vacation home?
It’s best to talk with a tax advisor before you start renting, or as soon as your use pattern changes. A professional can help you project how different levels of personal use and rental days will affect your deductions and whether you’re likely to generate allowable losses or be limited by the rules.
