Personal use of a rental property by an owner, or family of an owner, can result in limitations in how much of your expenses for the rental you can deduct. This is defined in section 280A of the tax code. It’s important to be aware of this limitation if you plan to use a rental for your own personal use or for a family member.
Calculating Personal and Fair Rental Days
It is considered personal use if any of the following apply:
- Use by an owner or partial owner of the property.
- If rented for less than the fair market rent price considering the location, condition, type of unit, etc.
- Use by a family member of an owner, unless they are paying fair market rent and it is their main home. Family is defined in section 267(c)(4) of the tax code as siblings (whole or half blood), spouse, ancestors, and lineal descendants of an owner. The tax courts have allowed rent for family members to be discounted up to 20% under fair market rent (reference: Bindseil v. Commissioner T.C. Memo 1983-411).
- A tenant staying as part of a home exchange type of arrangement.
- Use of the property by a charity or non-profit is still considered personal use time if they aren’t paying fair market rent.
These are some exceptions:
- Days spent working on the property do not count as personal use days. Section 280A says it’s not a personal use day “if the taxpayer is engaged in repair and maintenance on a substantially full-time basis for any day.” It doesn’t specify exactly how many hours count as “substantially full-time basis,” but this has been interpreted based on the use of these words in other parts of the tax code as meaning at least 4-6 hours per day.
- Days when it is your main home before or after a period when it was available for rent for at least 12 months.
- Days when it is your main home before you sell it.
Your number of “fair rental days” and “personal use days” must be entered on line 2 of your Schedule E for the rental property (or line 1 of form 8825 if it’s a partnership return). The first year you make a rental property available to rent, don’t include personal use days before the date the property is “placed in service” (available to be rented).
Renting 14 Days or Less
If you’re renting out a personal residence (home, vacation home, etc.) for 14 days or less in a calendar year, you don’t have to pay any income tax on the rental income (but your expenses related to the rental aren’t deductible either). This is a special exception known as the Augusta Rule, and in that case you simply don’t have to report the income at all, and the rest of the info in this article doesn’t apply.
Proportioning of Expenses
If you have any personal use days, you have to proportion house expenses like insurance, interest, property taxes, and depreciation based on this formula:
Deductible Expense = Expense * { Rental Days \over (Rental Days + Personal Use Days) }So only the portion of these expenses attributable to the fair market price rental days can be listed on your schedule E as a deductible expense against the rental income. Some tax software will make this computation automatically based on the number of rental and personal use days that you enter.
Expenses that are entirely attributable to the rental use (such as advertising costs) are called “direct expenses,” and those types of expenses can still be deducted in full because they are entirely attributable to the rental. But expenses that are shared by the personal use of the property, such as mortgage interest, are called “indirect expenses,” and they must be reduced using the formula above.
Note that if you are only renting it at below fair market rent, all of those days are just considered personal use days, so your deductible expenses for the property would just be zero. But unfortunately, the rent income is still counted as taxable income.
The personal use portion of property taxes and mortgage interest can be potentially deducted on the taxpayer’s Schedule A if they are using itemized deductions.
Limitation on Tax Loss from Personal Use
The tax law limits the deductions you can take on the property if your personal use of the property is more than 14 days in a year, and is also more than 10% of the number of days it was rented that year. In other words:
- If the total number of days it was rented for non-personal use during the year is greater than 140 days, then the personal use threshold is equal to 10% of the number of rental days.
- Otherwise, if the number of days rented was less than 140 days during the year, then the personal use threshold is 14 days.
For example, if it was rented 300 days out of the year, you can have up to 30 personal use days without crossing over the threshold (a “day” is counted as the number of overnight stays). If it was only rented out for 90 days, then you can have up to 14 days of personal use.
It’s important to know what this threshold is, because if you go over it by even one day, it can have a substantial impact on your taxes. If your personal use days count exceeds that calculated personal use threshold, then the property is classified as a “personal residence”, and expenses for the rental can’t exceed your rental income for the property. In other words, your expenses may at most wipe out your rental income.
The excess does get carried forward to future tax years as a “carryover of unallowed expenses”. That amount is generally tracked for your records by your tax software on IRS Publication 527’s Worksheet 5-1 “Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home”. This carryover amount can potentially offset future income from the same property if the future income exceeds the expenses in that future tax year. When your losses are limited under this rule, expenses other than depreciation are taken first, so you may not have depreciation to claim if your other expenses exceed your rental income before counting depreciation.
This type of carryover is completely separate from “suspended passive losses” that you may accrue when your income is limited by the passive active loss rules. And a property that is your personal residence that has positive rental income also can’t use suspended passive losses to offset that income.
Summary
Being able to use your rental property for personal use part of the year can be a great perk of owning a rental property, especially if it’s located in a vacation spot that you enjoy visiting. But it’s good to be aware of the tax implications of that personal use of a rental property.
