Your Guide To Understanding Vacation Home Tax Rules

Family on vacation

Many taxpayers are taking advantage of vacation rental companies such as Airbnb and VBRO to generate additional income from their vacation home or personal residence.  There are many tax rules and regulations regarding renting your home. Knowing these rules is important because if you don’t you run the risk of getting flagged by the IRS for incorrectly reporting your taxes.

Not sure how vacation rules work? In this article, we’ll cover everything you need to know about vacation home tax rules, so you can avoid tax troubles and keep the IRS out of your business.

Vacation Home Tax Rules

It’s important to know that vacation home tax rules differ depending on how much time you spend in your vacation home. The amount of time you spend there will impact how much you owe in taxes on rent, as well as the kinds of deductions you can claim against the property.

These are the 3-basic vacation-home tax situations

  • You rent your vacation home to other people for most of the year
  • You rent your vacation home to other people for a short period of time
  • You live in the home and only rent it when you’re not home

How long and how often you rent out your vacation home will impact your mortgage and property taxes. So, it’s essential to learn the ins-and-outs of the following scenarios so you can avoid tax troubles.

If You Rent Your House Out for 14 Days or Fewer During the Year

You won’t need to report the rental income on your tax return. You can also charge as much as you want for renting the property. The vacation home will still be considered a personal residence, however, so you can deduct mortgage interest and property taxes like you do for your main residence.

If You Rent Your House Out for More Than 14 Days During the Year

The IRS considers the vacation home to be your main residence. This means that you have to report any rental income that you make on it, but you can also deduct any rental expenses that incurred. You’ll also be required to allocate costs between when you’re using the property for personal purposes and the time it’s being rented out.

Curious what’s considered to be a day of personal use of a vacation home? A day of personal use of a vacation home is any day that it’s used by:

  • You or any other person who has interest in it
  • A member of your family or a family member of someone else who has interest in it
  • Anyone with an agreement to let you use another dwelling unit
  • Anyone who pays less than a fair rental price

If you limit your personal use to 14 days or 10% the vacation property is rented, it’s considered a business. This means you can deduct expenses and even losses, which means you can turn your second home into a true investment.

In fact, more than 50% of the people who finance their vacation homes can cover 75% or more of their mortgage costs by renting it out.

Final Thoughts on Vacation Home Tax Rules

Whether you rent your vacation home out year-round, or just a couple weekends a year, it’s important to know how the tax rules work. By keeping this guide in mind and connecting with a public accountant, you can figure out how to use your property in a way that works for you and your needs.

Do you currently have a vacation home? Do you need assistance with your property taxes? Let us know in the comments!


About the Author:

Chris Duncan, CPA

As a South Carolina native, Chris has spent the better part of his life in the Charleston area. Chris graduated from The Citadel with a degree in Business Administration (Accounting Concentration) in 1999. Chris has spent his career working with large manufacturing and distribution companies, real estate developers, as well as many high net worth individuals. In 2006, Chris launched his own CPA firm. For the past twelve years, Chris has worked as a local CPA and provided services to both individuals and commercial clients in a variety of industries to include accounting, bookkeeping, tax, and payroll services.

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