If you own a vacation home and only rent it to guests every blue moon, you might wonder: Do I need to report this on my federal income tax returns?
The first thing to know is this. A vacation house, cottage, apartment, mobile home, condo, or boathouse used partially for renting out and partially for personal enjoyment is deemed a mixed-use vacation property. Here’s how mixed uses break down at tax time.
Here’s When the IRS Sees a Vacation Home as a Personal Residence
Like many owners of vacation homes, maybe you use yours more since Covid-19 began. What used to be a rental property has morphed into a personal residence.
If you took in no rental income all year, the IRS considers your vacation home a personal residence.
Same goes for a vacation home you rented out for fewer than 15 days during the year, and lived in for more than 14 days. You don’t need to report any rental income on your federal income tax return. It’s taxed as a personal residence.
The Internal Revenue Service calls this its Minimal Rental Use rule, explaining:
There’s a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, don’t report any of the rental income and don’t deduct any expenses as rental expenses.
To put a finer point on it, a vacation home is deemed a personal residence if you and/or your friends or family hung out there for 14 days or 10% of the days you rented the home out at fair market rates — whichever of those two numbers of days is higher.
(Don’t count the days no one stayed in it or days you simply worked on it.)
So, then, does your (and your family and friends’) use of your vacation home add up to the greater of either 14 days, or 10% of the rental days? If so, then it’s taxed as a personal residence. See how the IRS lays out the taxation formula for renting residential and vacation property.
If the home counts as a personal residence, you may, as with your first home, deduct mortgage interest and property taxes on your personal tax return. You may deduct your rental-use expenses on Schedule E (“Supplemental Income and Loss”). You may only deductup to the amount of your gross rental income (that’s rental income minus marketing costs and real estate agents’ commissions).
Remember: If the home counts as a personal residence, you can’t deduct expenses involving the days it was rented (association fees, utilities, maintenance, marketing, etc.).
Here’s When the IRS Sees a Vacation Home as a Rental Property
You’ll need to declare “rental income” when you have rented the property more than 14 days of the year. You must report your rental income from the vacation property on your tax return — specifically on Schedule E.
It goes like this. You rent out your vacation property, for market value, for 14 days out of the year or more. And you or your buddies or family are there for no more than 14 days or no more than 10% of the days you rent the home out to outside guests at fair market rates — whichever adds up to the larger number. Days you were there to work on the house don’t count in these figures. Vacancy days don’t count, either.
If this is your situation, the IRS applies rental property tax rules to your vacation home.
This means you may claim the applicable tax breaks on your mortgage interest, insurance premiums, and property taxes. As the IRS explains:
These expenses, which may include mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance, and depreciation, will reduce the amount of rental income that’s subject to tax.
How do you allocate expenses between one use and the other? Imagine that in 2022, you (or family and friends) enjoyed your vacation cottage a total of 100 days. You rented it out at market value for 200 days. Your expense ratio is:
- Personal-use expenses: 100 of the 300 days of use.
- Rental expenses: 200/300 days.
You’ll use these figures to apportion your qualified property tax and mortgage expenses related to buying or upgrading the property. If you need further clarification on this point, H&R Block explains it pretty well here.
Pro tip: If you’re earning rental income, you might need to pay Net Investment Income Tax (NIIT). This 3.8% tax applies when your investment income rises above certain thresholds. Read more about NIIT on the IRS website.
Q&A Section: Common Questions About Deductions
You ask: Is the mortgage interest I pay on a second home deductible?
The IRS says: If you use your second home personally, then mortgage interest is deductible.
You ask:Is the property tax for the second home deductible, too?
As a general matter, the IRS says, homeowners may deduct state and local property taxes collected for the general welfare (the taxes that all the homeowners pay). They may not deduct local and state property taxes that specifically benefit their own, individual homes. Homeowners may claim a deduction for the total of every form of state and local tax combined, up to a cap of $10,000 (or $5,000 for couples who file separately).
You ask: If I have a second home, should I rent it out?
The answer varies from person to person, depending on how they and their families feel about renting their properties out. Some people do find it advantageous to rent out their second properties (including boats or mobile homes). These owners are then able to claim deductions for their rental property expenses. Speak to your accountant about potential impacts in your case. In some cases deductions can include utilities, repairs and upkeep, and HOA fees. Even if the owner stays in the second home more than 14 days a year, rental expenses can still be deducted — apportioned according to the number of rental days versus all of the use days.
Please note: This article is not financial advice or tax guidance, but general information and a starting point for your own due diligence. Your accountant can provide guidance that’s specific to your set of facts and the ways in which tax laws apply. The Tax Cut and Job Act has changed some rules on itemizing deductions, and may affect the way you pay taxes on a second home.
U.S. Internal Revenue Service (IRS): Topic No. 415, Renting Residential and Vacation Property (updated Aug. 29, 2022).
U.S. Internal Revenue Service (IRS): Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses) (updated Sep. 2, 2022).
Brady Ware & Company: Tax Implications for a Vacation Home Classified as a Personal Residence (Jul. 19, 2021).
HRBlock.com: Vacation Home Rental Tax Rules.
Scott Steinberg for Rocket Mortgage®: Seven Considerations to Make Before Buying a Vacation Home (Jun. 3, 2022).
Abip CPAs/Advisors: Renting Out a Second Home (Feb 26, 2021).
And as linked.