If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Enter the rental expenses on Schedule E and the personal expenses (which are eligible for itemized deductions) on Schedule A. Entering the days of personal use and days the property is rented on Schedule E does not prorate the expenses between personal and rental. The entry of days is only used for the calculation of the Vacation Home Limitation Worksheet, if it is necessary, or the determination that there was only minimal rental use.
You will find detailed information and examples in IRS Publication 527 Residential Rental Property (Including Rental of Vacation Homes).
The following information is from IRS Publication 527, starting on page 17:
Personal Use of Dwelling Unit (Including Vacation Home)
If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Only your rental expenses may deducted on Schedule E (Form 1040). Some of your personal expenses may be deductible on Schedule A (Form 1040) if you itemize your deductions.
You also must determine if the dwelling unit is considered a home. The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year.
Dwelling unit. A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. It also includes all structures or other property belonging to the dwelling unit. A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities.
A dwelling unit doesn’t include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment. Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and isn’t used by an owner as a home during the year.
Dwelling Unit Used as Home
If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home.
You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of:
If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, don't count that day as a day of rental use in applying (2) above. Instead, count it as a day of personal use in applying both (1) and (2) above.
What is a day of personal use? A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons.
Main home. If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time.
Days used for repairs and maintenance. Any day that you spend working substantially full time repairing and maintaining (not improving) your property isn’t counted as a day of personal use. Don’t count such a day as a day of personal use even if family members use the property for recreational purposes on the same day.
Minimal rental use. If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period isn’t treated as rental activity. See Used as a home but rented less than 15 days, later, for more information.
Limit on deductions. Renting a dwelling unit that is considered a home isn’t a passive activity. Instead, if your rental expenses are more than your rental income, some or all of the excess expenses can’t be used to offset income from other sources. The excess expenses that can’t be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Any expenses carried forward to the next year will be subject to any limits that apply for that year. This limitation will apply to expenses carried forward to another year even if you don’t use the property as your home for that subsequent year.
To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 5-1.
Reporting Income and Deductions
Property not used for personal purposes. If you don't use a dwelling unit for personal purposes, see chapter 3 for how to report your rental income and expenses.
Property used personal purposes. If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home.
Not used as a home. If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in this chapter under Dividing Expenses. The expenses for personal use are not deductible as rental expenses.
Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses in chapter 3.
Used as a home but rented less than 15 days. If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function isn’t considered to be rental and it shouldn’t be reported on Schedule E (Form 1040). You aren’t required to report the rental income and rental expenses from this activity. The expenses, including mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses.
Used as a home and rented 15 days or more. If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in this chapter under Dividing Expenses. The expenses for personal use aren't deductible as rental expenses.
If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. You don't need to use Worksheet 5-1.
However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. To figure your deductible rental expenses and any carryover to next year, use Worksheet 5-1.
Worksheet 5-1 is included in the TaxAct® program and will be populated based on your entries. If you would like to review Worksheet 5-1 and its instructions, please refer to pages 20-21.