If you rent your vacation home for more than 14 days, you must report the income and expenses on you individual income tax return. Any rental of less than 15 days is considered a casual rental and is not required to be reported.
The only deductions for casual rentals are the mortgage interest and property taxes which are reported on Schedule A of Form 1040.
If the rental is not casual, it is reported on Page 1 of Schedule E of Form 1040. However, the rental could be considered personal. Normally we use our vacation home to vacation. Therefore there is a test you need to meet. The rental activity is personal if the personal use is greater than 14 days per year or 10% of the days you rented to third parties. If you used it for 17 days and it was rented for 160 days, it will be personal.
If the rental is personal, you can deduct the expenses for the activity only to the extent you have rental income.
For non-personal rentals, you can deduct the expenses even if they exceed the rental income. In both cases, personal and non-personal, 100% of the expenses are not deductible. You have to prorate expenses based on the days of rental and personal use. For example if it was rented for 85 days and you used it for 14 days, the expenses would be multiplied by (85/99) to arrive at the expense deduction on Schedule E. The personal portion of the mortgage interest and property taxes are deducted on Schedule A. The balance of the personal portion of expenses is not deductible.
What expenses can be deducted? The most common ones are advertising, auto and travel, cleaning and maintenance, commissions, depreciation, insurance, legal and professional fees, management fees, mortgage interest and points, repairs, taxes and utilities. Consideration needs to be given to repair items. If they prolong the life or increase the value of the property, they need to be capitalized and depreciated. Deprecation – how do you compute? You cannot deprecate the land. The building is deprecated using the IRS MACRS 27.5 year life method. Most people have no idea what this means. You can go to the IRS Publication 527, Residential Rental Property, using this link, http://www.irs.gov/pub/irs-pdf/p527.pdf , for assistance.
The IRS also has limits on rental losses. One limit is ‘at-risk rules.” Another is ‘passive activity limits.” Both of these are intricate and not easily be explained here. Contact your ShindelRock tax professional for an explanation that would fit your facts and circumstances.