What Happens If I Use My Rental Property More Than 14 Days?

Owning a rental property can be an appealing investment, offering potential income and tax advantages. However, personal use exceeding certain limits can significantly alter these benefits. If you use your rental property for more than 14 days or 10% of the total days rented at fair market value, the IRS may reclassify your property. Understanding these rules is essential for property owners aiming to optimize financial outcomes.

Impact on Property Classification

Using a rental property beyond the 14-day personal use threshold can reclassify it as a personal residence under IRS guidelines. This reclassification changes how income and expenses are reported on tax returns. A property is considered a personal residence if personal use exceeds the greater of 14 days or 10% of the days rented at fair market value. This limits deductions for rental-related expenses—such as mortgage interest, property taxes, and maintenance costs—to the extent of rental income. Additionally, property owners lose the ability to claim a loss on the property, which can affect their overall tax strategy.

Adjusting Allowable Deductions

If a rental property is reclassified as a personal residence, allowable deductions are curtailed. The IRS mandates that expenses be divided between personal and rental use. For instance, if a property is rented for 100 days and used personally for 20 days, only 83% of the expenses can be deducted as rental expenses. This impacts deductions for utilities, insurance, and repairs, making detailed records necessary to substantiate claims.

The Tax Cuts and Jobs Act further complicates this by capping mortgage interest deductions on personal residences at $750,000 of acquisition indebtedness. For mixed-use properties, any excess interest must be allocated to personal use, which is non-deductible beyond standard limits.

Changes in Depreciation

Depreciation allows property owners to recover costs over time. When a rental property is reclassified as a personal residence, it no longer qualifies for the Modified Accelerated Cost Recovery System (MACRS), which depreciates residential real estate over 27.5 years. Instead, straight-line depreciation, typically with a longer recovery period, must be used. This reduces the annual depreciation deduction, increasing overall tax liability.

Passive Activity Loss Rules

The Passive Activity Loss (PAL) rules restrict deductions of losses from passive activities against non-passive income. Rental real estate is generally considered a passive activity, but excessive personal use can change this classification. Taxpayers actively participating in rental real estate can deduct up to $25,000 of losses from non-passive income, subject to a phase-out starting at $100,000 of modified adjusted gross income (MAGI). When a property is reclassified to personal use, this exception is no longer available, limiting the ability to offset other income.

Carrying Forward Disallowed Losses

Reclassifying a rental property as a personal residence also affects disallowed losses. Losses that cannot be deducted in the current tax year due to PAL rules are usually carried forward to offset future rental income or gains from the property’s sale. However, after reclassification, these losses remain suspended until the property is sold in a taxable event. This restriction can have long-term tax implications, as suspended losses cannot reduce taxable income until the property is sold. Consulting a tax advisor can help property owners evaluate options, such as converting the property back to full-time rental use or selling the property, to unlock these losses.