Fullerton, Lemann,
Schaefer & Dominick, LLP

Renting Residential and Vacation Property

Generally, if you own a house or an apartment that you rent to others, you are entitled to deduct certain expenses such as repairs, maintenance, utilities, insurance, interest, taxes, and depreciation to reduce the amount of taxable rental income. If you do not use the dwelling unit as your home and are renting it to make a profit, your deductible rental expenses may exceed your gross rental income (with certain limitations, of course.) However, if you use the house or apartment as your home or vacation home, stricter limitations apply to the amount of deductible losses.

Use as a Home

In order to decide whether you have used a dwelling as your home during the year, you must determine whether you used the dwelling for personal purposes for more than the greater of 14 days or 10 percent of the total days you rented it at its fair market value. Using this calculation, it is possible for a taxpayer to use more than one dwelling unit as a home during a year.

For example, if you live in your main house for 10 months a year and rent it out for three weeks, you have used it as a home. In addition, you live in your vacation house, which you rent out for five months, for the remainder of the year. Using the Internal Revenue Service definition of "home," you have used it for 60 days, which is greater than 10 percent of the five months during which it was rented. Your personal use time exceeded the statutory 14 days; therefore, you have a second "home" for tax purposes.

A taxpayer uses a dwelling for personal use if it is used by:

Tax Implications of Using a Dwelling Unit for Both Rental and Personal Purposes

The general rule is that if you use a dwelling (including your vacation home) for personal along with rental purposes, you are required to divide the total expenses between the rental use and the personal use. The tax laws limit the deduction of rental expenses resulting from property used for both rental and personal purposes to the amount of gross rental income. In other words, unlike the rental of a dwelling unit that is not used as the taxpayer's home, you cannot take a loss from the rental of a house or apartment that is used for both rental and personal purposes. However, if the taxpayer itemizes deductions, he may be entitled to deduct mortgage interest, real estate taxes, and casualty losses not taken as rental expenses.

De Minimis Use

If you only rent out the house or apartment for less than 15 days, you can pretend that the rental transaction never happened for income tax purposes. You do not report any of the income, and you are not permitted to deduct any of the expenses as rental expenses. Once again, certain expenses connected with home ownership are deductible if the taxpayer itemizes deductions.

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