Tax Implications of Vacation Homes

General

According to IRC Section 280A, when a home is used for both personal and rental purposes, expenses generally need to be divided between those uses. The rental portion may be deductible, but the amount you can deduct depends on how the property is used throughout the year.

Generally, a property rented for profit may generate deductible rental losses, although passive activity, at-risk, and other limitations can restrict when those losses are used. Personal expenses and losses from selling a personal-use home generally are not deductible.

However, what determines the property type?

Under Section 280A(d)(1), a property is considered a residence for these rules if personal use exceeds the greater of:

• 14 days; or
• 10% of the total days it is rented at a fair rental price.

The word “exceeds” matters.

Example: You rent your vacation home at fair market rent for 200 days. Ten percent is 20 days. If you use the property personally for 21 days, it is considered a residence under Section 280A. If you use it personally for exactly 20 days, you have not exceeded that threshold.

Being considered a residence does not mean the rental income disappears. It changes the limitations that apply to your deductions.

What counts as personal use?

Personal use generally includes days used by you, certain family members, other owners, or anyone paying less than a fair rental price. Home-exchange arrangements can also count.

Note: Rentals to family members generally count as personal use unless the property is their principal residence and they pay a fair rental price. A family vacation stay can therefore count as personal use even when they pay market rent.

What if the home is rented for 14 days or less?

If the property qualifies as a residence and is rented for fewer than 15 days during the year, the rental income generally is excluded from federal gross income. Rental expenses are not deductible.

However, qualifying mortgage interest and property taxes may still be deductible as personal itemized deductions, subject to the applicable limits.

What if the home is rented for 15 days or more?

The rental income generally must be reported.

If personal use exceeds the residence threshold, Section 280A generally prevents rental-use deductions from creating a loss against other income. Certain unused expenses can carry forward, subject to the applicable limits in future years.

If personal use does not exceed the threshold and the property is rented for profit, a rental loss may be allowed. However, that does not automatically mean it can offset your salary or business income. The passive activity and other loss rules still need to be considered.

How are expenses divided?

For many shared operating expenses, the IRS generally uses rental days divided by total days of rental and personal use.

Example: A home is rented for 120 days and used personally for 30 days. The rental-use percentage for those shared expenses would generally be:

120 / 150 = 80%

Days simply available for rent but not actually rented generally are not included as rental days in this mixed-use calculation. Expenses directly attributable to renting, such as advertising, are considered separately. Mortgage interest and property taxes can involve additional allocation rules, so one percentage should not automatically be applied to every expense.

What changed under the OBBBA?

The OBBBA did not replace the basic 14-day/10% personal-use test or the fewer-than-15-days rental exception. However, several related provisions can affect vacation-home owners:

• Mortgage interest: The $750,000 acquisition-debt limit became permanent, or $375,000 if married filing separately. Qualifying older debt may retain the higher limits. The applicable limit generally covers your main and qualifying second home combined.
• Property taxes: The OBBBA temporarily increased the personal state and local tax deduction limit, subject to income limitations. The personal portion of vacation-home property taxes shares that limit with your other deductible state and local taxes.
• Bonus depreciation: The OBBBA restored 100% bonus depreciation for eligible property acquired and placed in service after January 19, 2025, subject to the qualification rules. Certain rental furnishings, appliances, and qualifying components may benefit. The vacation-home building itself does not automatically qualify, and depreciation does not override personal-use or loss limitations.

Other considerations

Keep a calendar documenting rental days, personal stays, family use, and maintenance visits. Maintain rental agreements, evidence of fair market rent, receipts, and expense records.

Days spent working substantially full time on repairs and maintenance generally do not count as personal-use days. A vacation with a few repairs mixed in should not automatically be treated the same way.

For more information and for planning around your vacation home, please schedule a call with our office for a preliminary planning consult.