What IRS Deductions Can Be Taken for a Vacation Home?

Navigating the tax implications of owning a vacation home involves understanding specific rules that determine available deductions. The way a vacation home is used—whether primarily for personal enjoyment, predominantly as a rental, or a mix of both—significantly impacts its tax treatment, dictating which expenses can be deducted and how income must be reported.

Classifying Your Vacation Home Use

The classification of a vacation home for tax purposes hinges on distinguishing between “personal use days” and “rental days.” A personal use day includes any day the owner, a family member, or anyone paying less than a fair rental price uses the home, or when the owner swaps the home for another dwelling. Even if the owner uses the home for a brief period, such as one hour, that entire day counts as a personal use day. Days spent on substantial repairs and maintenance generally do not count as personal use days.

A rental day is any day the property is rented out at a fair rental price, meaning the amount a willing renter would pay for similar properties. Accurate record-keeping is essential for tracking both personal and rental days, as these records determine the property’s tax classification and expense allocation.

The Internal Revenue Service (IRS) generally considers a dwelling unit used as a home if personal use exceeds the greater of 14 days or 10% of the total days it is rented at a fair rental price during the tax year. This threshold influences whether the property is treated as a personal residence, a rental property, or mixed-use, each with distinct tax implications. If personal use falls below this threshold, the property is generally treated more like a pure rental business.

Deductions for Primarily Personal Use

When a vacation home is used primarily for personal enjoyment and not rented out for significant periods, specific deductions may still be available. The property must qualify as a “qualified residence,” which includes a main home and one other home chosen by the taxpayer.

Homeowners can typically deduct qualified mortgage interest paid on the loan used to acquire or substantially improve the property. This deduction is generally limited to interest on acquisition debt. Real estate property taxes paid on the vacation home are also generally deductible. However, the deduction for state and local taxes, including real estate taxes, is capped at $10,000 per household ($5,000 for married individuals filing separately). These deductions are typically claimed as itemized deductions on Schedule A of Form 1040.

Deductions for Primarily Rental Use

A vacation home used primarily as a rental property, with minimal or no personal use, allows for a broader range of deductions. The property is treated more like a business, and all “ordinary and necessary” expenses related to the rental activity are generally deductible.

Deductible expenses include utilities, repairs, maintenance, insurance premiums, property management fees, and advertising costs. Depreciation, which accounts for the wear and tear of the property, is also a significant deduction for rental properties.

Rental income and expenses are generally reported on Schedule E (Form 1040). While many expenses are deductible, rental losses may be subject to passive activity loss limitations. These rules generally restrict the deduction of losses from passive activities, such as rental real estate, to the amount of passive income. However, a special allowance of up to $25,000 may apply for taxpayers who actively participate in the rental activity and meet certain income thresholds.

Rules for Mixed Personal and Rental Use

When a vacation home serves both personal and rental purposes, specific rules govern expense allocation and potential deductions. This mixed-use scenario is subject to the “14-day rule” or “10% rule.” If personal use exceeds the greater of 14 days or 10% of the total days the home is rented at fair market value, the property is classified as a residence used for both purposes.

In such cases, all expenses must be allocated between rental and personal use based on the number of days used for each purpose. For example, if a property is rented for 200 days and used personally for 50 days, 80% (200/250) of expenses would be allocated to rental use, and 20% (50/250) to personal use. The rental portion of expenses is generally deductible, but rental expenses cannot exceed the gross rental income after accounting for the rental portion of deductible mortgage interest and property taxes. This means a net rental loss cannot be created or deducted for mixed-use properties that qualify as a residence.

The order of deductions for mixed-use properties is specific. First, the rental portion of expenses like qualified mortgage interest and real estate property taxes are applied against rental income. Next, operating expenses such as utilities, repairs, and maintenance are deducted, limited to the remaining rental income. Finally, depreciation can be taken, but only up to the point where rental income is reduced to zero. Any personal use portion of mortgage interest and property taxes may still be deductible as itemized deductions on Schedule A, subject to applicable limits. Careful record-keeping of all income and expenses, along with the precise number of personal and rental days, is essential for accurate calculation and compliance.