If you own a vacation home, whether it’s a beach condo, lake cabin or mountain retreat and you sometimes rent it out, it’s important to understand when that rental income must be reported to the IRS, and how deductions work. The tax treatment depends heavily on how often you rent the property, how much you use it personally, and how you allocate income and expenses.
If you rent out your vacation home for 14 days or fewer in a year, and you use it personally for more days than you rent it, then under IRS rules you do not have to report the rental income and rental-related expenses cannot be deducted. Once you rent the property for more than 14 days, rental income becomes taxable, and you must report it on your tax return typically via Schedule E (Form 1040).
When a vacation home serves both personal-use property and a rental, you must divide expenses between the rental portion and personal portion usually based on the ratio of rental days to total days used. Deductible rental expenses may include (for the rental portion only): mortgage interest, real estate taxes, maintenance, repairs, insurance, utilities, depreciation, property management or advertising fees, and other ordinary rental property costs.
The personal portion of the home’s use such as days you or family stay there, cannot be included in rental-expense deductions.
As a landlord, you must report all rental income received including rent, advance rent, or even services received in lieu of rent in the year you receive it if you’re on the cash-basis method, which most individuals are.
You may deduct allowable rental expenses, but only up to the amount of rental income earned. Losses or negative net rental income may be subject to passive-activity limitations and other IRS rules.
Despite various changes in tax laws over the years, the fundamental rules for vacation-home rentals remain consistent: how much you rent vs. personal use determines whether income must be reported, and how deductions are allowed. Many owners who operate a vacation home as a rental still must comply with IRS reporting rules and ignore them at their own risk.
For many, this means continuing to maintain accurate use- and rental-day logs, carefully tracking rental income and expenses, and prorating deductions when personal use is involved.
Keep a calendar or log of all days the property is rented and all days of personal use to support your rental classification if audited. Save records of all rental-related income and expenses (repairs, maintenance, property management, utilities, mortgage interest, taxes, depreciation, etc.).
Be careful with combined personal and rental use properly to allocate and prorate expenses and avoid deducting personal-use costs. If you plan to rent only occasionally and prefer to skip reporting, consider keeping the total rental days under 15 but be aware of potential 1099 income reporting from platforms and good recordkeeping needs.
The tax rules for vacation homes are complicated, and different rules apply if your place is used primarily as a rental (with limited personal use). Contact your tax advisor to help ensure you comply with the current rules for reporting rental income and expenses on your 2025 tax return, as well as to discuss possible additional tax-saving opportunities.
There are several provisions of the Tax Cuts and Jobs Act (TCJA) that will affect vacation home owners.
New limit on property tax deductions. For 2018 through 2025, the TCJA limits itemized deductions for personal state and local property and income taxes to a combined total of only $10,000 ($5,000 for those using married filing separately status). Under prior law, you could claim itemized deductions for an unlimited amount. The new limit can affect your ability to claim itemized deductions for property taxes on a vacation home that's classified as a personal residence.
New limits on home mortgage interest deductions. For 2018 through 2025, the TCJA limits the amount of home mortgage debt from which you can claim itemized deductions for qualified residence interest expense. These limits can affect your ability to claim itemized deductions for mortgage interest on a vacation home that's classified as a personal residence.
Specifically, you can treat interest on up to $750,000 of home acquisition debt (incurred to buy or improve a first or second personal residence) as deductible qualified residence interest ($375,000 for married filing separately status).
In addition, the TCJA generally eliminates the prior-law provision that allowed you to treat interest on up to $100,000 of home equity debt as deductible qualified residence interest ($50,000 for married filing separately status).
These limitations mainly affect newer buyers, because existing mortgages are grandfathered in under pre-TCJA limits. Ask us for more information about your situation.
Increased standard deductions. For 2018 through 2025, the TCJA almost doubled the standard deduction amounts. This change can adversely affect vacation home owners because their itemized deductions (including those for mortgage interest and property taxes) may not exceed their standard deduction amount for 2018 through 2025.
The three most likely ways to meet the material participation standard for a vacation home rental activity are when:
To clear these hurdles, you can combine your time with your spouse's time. Realistically, however, if you use a property management firm to handle your property, you're unlikely to pass any of the material participation tests.
Suppose you're unable to take advantage of the $25,000 passive loss exception for rental real estate because your adjusted gross income (AGI) is too high. You have zero passive income, and you don't qualify as a real estate professional. As a result, you've been piling up suspended passive losses from your vacation home rental activity.
However, you may be able to transform the activity into a "business" by reducing the average rental period to seven days or less. Then, as long as you can pass one of the material participation tests for the property, you can avoid the PAL rules and deduct the losses against your other income.
Get in touch today and find out how we can help you meet your objectives.
