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Residences used personally by the taxpayer generally fall into one of three categories when determining their tax treatment:
- Personal Residence with Very Limited Rental Use – If you have a residence that is rented fewer than 15 days, you have no Schedule E reporting requirements. Any income derived from renting your residence for less than 15 days is considered to be tax-exempt, nonreportable income. If you own a place in Augusta, Georgia, for example, you could rent your residence for the Masters Golf Tournament and not claim the income as long as it is less than 15 days.
- Vacation Home with Both Rental and Personal Use – If you are renting your property more than 14 days, then your deductions are limited to the amount of income from the property. Also, you must prorate the expenses between personal use and rental use. Since the expenses cannot produce a taxable loss, the expenses that are limited under the net income rule are eligible for carryforward to future years, but remain subject to the net income limitation. Keep in mind that the personal portion of mortgage interest and real estate taxes can be deducted as itemized deductions.
- Rental Property with Very Limited Personal Use – If you have a property that is rented during the year and personal use does not exceed the greater of (1) 14 days or (2) 10% of rental days, it is not considered a residence. You still must allocate deductions for the period of personal use and the property is subject to passive activity loss limitations. Also, the personal portion of the mortgage interest is lost because the property does not qualify as a residence.
In certain cases it may make sense to extend your personal use so that the property comes under the vacation home rules rather than rental rules, but let’s have a discussion before doing so.
If you have any questions about what is considered to be a personal use day or how many days you have used as personal use days – contact us. We’d be pleased to discuss these rules with you and be sure that you are reporting your property the correct way.