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Vacation Home Tax Rules: Understanding 4 IRS Rules For Rental Properties

Posted by Pete Deininger on Thursday, November 16, 2023 at 9:14:18 AM By Pete Deininger / November 16, 2023 Comment
Tax Rules for Renting Out Your Vacation Home

If you're thinking about renting out your vacation home for some extra cash flow, you should know about the tax rules and regulations that apply before going through with it. Vacation rental tax rules can look quite different depending on how often you rent out the home and how often you use it yourself!

Let’s break down the legalese of the IRS rules for rental property to help you understand what income you need to report (if any), which expenses you can deduct, and what other tax benefits you may be eligible for.

Personal vs. Rental Property

Depending on how many days you rent out your vacation home, you may qualify for different tax benefits. The IRS uses the number of days you use the home vs. the number of days you rent the home to decide if your property qualifies as a vacation home vs. an investment property for expense deduction purposes.

If you meet a certain minimum days of personal use during the year, you qualify as a personal residence being rented out. This minimum is either 15+ days or more than 10% of the number of days you rent the home, whichever is longer.

For example, if you rent for 100 days out of the year, 10% is 10 days, so the minimum of 15 days would apply. If you rent for 200 days out of the year, 10% is 20 days, so you’d have to use the home yourself for at least 21 days to qualify as a personal residence. If you use the home yourself for 30 days, you can rent for up to 299 days and still qualify.

However, if you use it yourself for fewer than 14 days and rent it for 15+ days, it’s an investment property, and different tax breaks apply.

In either case, you can deduct certain expenses related to the rental property. If your vacation home is used exclusively for personal enjoyment, tax breaks for second homes apply. You can apply for mortgage interest deductions (Form 1040 or 1040-SR and itemize deductions on Schedule A). If your state and local tax deduction (SALT) is less than $10,000 on your first home. For example, for income and property taxes, you may also see additional savings from your second home up to the cap.

If the property is used for rental purposes, you'll fall into one of three categories:

  • The home was rented for less than 14 days
  • The home was rented for 15+ days, and the owner used it for less than 14 days
  • The home was owner-occupied for more than 14 days (or 10% of total rented days)

You can split your expenses based on the ratio of personal use vs. rental use and apply for tax deductions for investment properties. These include business expenses like mortgage interest, depreciation, business travel, and repairs (but not improvements). 

Knowing the tax rules and regulations is essential for taking advantage of tax benefits and avoiding surprises during tax season.

Home Rented for 14 Days or Less

Renting a Home Out For Less than Two Weeks Can Be Tax-Free

If you rent your vacation home for less than 15 days a year, you simply don’t need to report rental income to the IRS. This tax break is known as the Masters tax exemption, named for a common practice of homeowners near the Augusta National Golf Club renting out their homes for the duration of the Masters golf tournament. When Congress started debating rental income taxes during the 1970s, these homeowners lobbied to keep their ability to do this tax-free, and so every rental owner now benefits from this specific exemption.

You can earn up to two weeks’ worth of rental income tax-free. If you want to maximize this, you should research the best 14 days to rent out your home for your location before you get started.

However, since you’re not reporting any rental income, keep in mind that you also can’t deduct any rental expenses.

Rented for 15+ Days, Owner Uses for Less than 14 Days

When renting out your vacation home for more than 15 days but using it for less than 14, you must report all rental income to the IRS and can apply for business-related tax deductions.

You may be able to deduct certain expenses related to the rental property, such as fees paid to property managers, insurance premiums, maintenance expenses, mortgage interest, property taxes, utilities, and depreciation. The amount of deductible expenses is determined by the percentage of rental days compared to the total days of use.

Your rental income is subject to the Net Investment Income Tax. If your adjusted gross income (AGI) is $100,000 or less, you may be able to deduct up to $25,000 in losses if you manage the property yourself.

If your investment property is in another state, keep in mind that you may pay non-resident income taxes for income earned in that state. Additionally, foreign real estate properties may be subject to taxes in the country where the property is located, so proper record-keeping is essential. Keeping proper records will be a big help when you consult with a tax professional.

Owner-Occupied for More than 14 Days (or 10% of Rented Days)

If you use your vacation home for more than 14 days per year (or more than 10% of total rented days) for your personal enjoyment but also rent for more than 14 days, you must report your rental income, but you can still benefit from tax deductions.

What happens in this case is that you divide your expenses between personal use expenses and business expenses based on how many days were personal use vs. rental use.

You can deduct real estate taxes and mortgage interest for both the personal use and business use proportions of your use of the home. However, you can only deduct insurance, maintenance, utility costs, and other rental expenses for the business use portion. 

You should keep detailed records of your rental income and expenses to ensure that you are taking advantage of all the tax benefits available to you. It's important to consult with a tax professional to understand the deductions available for your particular situation.

Understand Vacation Rental Tax Rules And Make a Profit

Investigating the tax rules for renting out your vacation home can be a daunting task, but it's worth it not to be surprised during tax season. With the right knowledge and assistance, you can take advantage of potential tax savings, stay in compliance with IRS regulations, and make a lot of money with your rental.

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