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A client recently asked me about the tax implications of buying a vacation home “somewhere far away from Los Angeles,” renting it out on Airbnb part of the year, and taking a 2-week family vacation there once a year.
I explained to him that the tax code is very granular when it comes to vacation homes.
How many days you use a vacation home for personal/family use vs. how many days you use it for rental use will dictate how much income you have to report on your tax return as well as how much in deductions you can take against that income.
Let’s walk through the three scenarios a vacation home can fall into for tax purposes based on how many days the home is used personally vs. how many days the home is used as a rental.
Table of Contents
Scenario 1: Tax-Free Vacation Home
Personal Use: > 14 Days
Rental Use: < 15 Days
This scenario is generally the best tax answer, but it’s also the least profitable because you’re only renting the vacation home for a couple weeks during the year!
Under this scenario, all the rental income you receive is tax-free. Of course, because you aren’t recognizing any income, you can’t take any deductions either.
The only exception is that you can deduct real estate taxes and mortgage interest on this home as an itemized deduction, assuming you itemize deductions rather than taking the standard deduction.
If you own more than one vacation home, you must select the one to be treated as the second home for mortgage interest deduction purposes.
Scenario 2: Vacation Home Used as a Rental
Personal Use: < 15 Days
Rental Use: > 14 Days
Under this scenario, you report on Schedule E all rental income you receive from renting out the vacation home, and you can deduct the full amount of direct rental expenses such as property management fees, advertising fees, credit checks, etc.
However, other costs — property taxes, mortgage interest, repairs, maintenance, cleaning, insurance, utilities, and yes, depreciation — must be allocated them based on the amount of time the property was rented and the time it was used personally (using the total number of days the property was used during the year as your denominator).
You can deduct the property taxes for the prorated personal use period on Schedule A along with your other itemized deductions.
You cannot take an itemized deduction for mortgage interest on Schedule A.
Scenario 3: Vacation Home Used as a Residence
Personal Use: > 14 Days
Rental Use: > 14 Days
Under this scenario, you report on Schedule E all income you receive from the property and take deductions in the following order:
- Mortgage interest and property taxes to the extent the property was used as a rental
- Direct rental expenses
- Operating expenses to the extent the property was used as a rental
- Depreciation to the extent the property was used as a rental
If your property results in a tax loss, you cannot net it against other rental income.
It must be carried forward to future years, and even in those future years, the loss may only be applied to rental income from the same property.
Other Considerations
Now, these aren’t the only tax considerations when it comes to renting out a vacation home.
For one, if your vacation home is in another state from where you live, and that state imposes an income tax, you will likely have to file a tax return in that state.
Also, if your vacation home guests’ average rental period is 7 days or less, your vacation home profit may not even be considered a rental activity but rather a business activity, subjecting you to the dreaded self-employment tax.
Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
