When you use a home for both rental and personal use, regardless of that home’s location at the beach or in the city, you run into the tax code’s vacation home rules that make that home either a residence or a rental property.
It’s a residence when you
- rent it for more than 14 days during the year and
- use it for personal purposes for more than the greater of 14 days or 10 percent of the days that you rent the home out at fair market rates.
Example. You own a beachfront vacation condo. During the year, you rent it out for 180 days. You and members of your family stay there for 90 days. The property is vacant the rest of the year except for seven days at the beginning of winter and seven days at the beginning of summer, which you spend maintaining the property. Your condo falls into the tax code–defined personal residence because
- you rented it out for 180 days, which is more than 14 days, and
- you had 90 days of personal use, which is more than 14 days and more than 10 percent of the rental days.
Disregard the 14 days you spent maintaining the place.
The fundamental principle that applies when your vacation home is a personal residence is that expenses other than mortgage interest and property taxes allocable to the rental use cannot exceed the gross rental income from the property. In other words, rental operating expenses and depreciation cannot cause a tax loss on Schedule E of your Form 1040 for the year in question.
If you have such a property and want to discuss some planning strategies for its use, drop me a line here or schedule an advisory session on my calendar. Let’s talk about your tax strategy.