What Is the 2 Rental Rule? A Look at the 14-Day Exception
Renting your personal home involves specific tax considerations. Understand how the duration of a rental impacts whether income is reported or expenses are deducted.
Homeowners who rent out their property for short periods encounter specific tax considerations. Questions frequently arise regarding the tax implications of renting a home for brief durations, such as during a local event or for a vacation. The tax code provides distinct guidance for these scenarios, which differs significantly from the rules for long-term rental properties.
The 14 Day Rental Exception
A provision in the tax code, Internal Revenue Code Section 280A, provides an exception for short-term rentals. This rule, sometimes called the “Masters Rule,” states that if you rent your personal residence for 14 or fewer days during the year, you are not required to report that rental income. The income received is tax-free.
The direct consequence of this benefit is that you cannot deduct any expenses associated with the rental. Costs such as cleaning fees, commissions paid to a rental platform, or specific supplies purchased for the renters are not tax-deductible. The Internal Revenue Service (IRS) defines a “dwelling unit” to include a house, apartment, condominium, mobile home, boat, or similar property. A “day of rental” is any day for which the property is rented at a fair rental price.
Qualifying for the Exception
To benefit from the 14-day exception, the property must qualify as the taxpayer’s personal residence. This is determined by a specific personal use test outlined by the IRS. Under this test, the taxpayer’s personal use of the dwelling unit must be more than the greater of two amounts: 14 days, or 10% of the total days the property is rented to others at a fair market price.
A “personal use day” includes any day the unit is used by the taxpayer or any other person who has an ownership interest in the property. It also covers use by family members, even if the taxpayer is not present. Any day the property is used by another person under an arrangement that does not involve a fair market rental price also counts as a personal use day.
Tax Treatment for Rentals Exceeding 14 Days
When a property is rented for 15 or more days and also meets the personal use test described previously, the tax situation changes completely. All rental income must be reported to the IRS. This income is reported on Schedule E (Supplemental Income and Loss), which is filed with your Form 1040.
The primary task then becomes allocating the property’s expenses between personal and rental use. Expenses like mortgage interest, property taxes, insurance, utilities, maintenance, and depreciation must be divided. The allocation is based on the number of days the property was used for rental purposes compared to the total number of days it was used for both rental and personal purposes. The rental portion of these expenses can be deducted on Schedule E, but only up to the amount of your rental income. The personal portion of mortgage interest and property taxes may still be deductible on Schedule A if you itemize deductions.
Record Keeping Requirements
Maintaining meticulous records is important whether you qualify for the 14-day exception or are required to report rental income. You should keep a detailed log that tracks the specific days the property was used for personal purposes and the days it was rented at a fair market price. This log is the primary evidence for meeting the personal use test or for allocating expenses.
You should also retain all records of rental income received, including statements from rental platforms like Airbnb or VRBO, and bank statements showing deposits. For expenses, keep every receipt and invoice for items such as:
- Mortgage interest statements
- Property tax bills
- Insurance policies
- Utility bills
- Receipts for repairs, cleaning, and supplies
The IRS requires keeping tax records for at least three years after filing, but this can be extended to six years if you underreport your gross income by more than 25%. Records related to the property itself, such as purchase documents and receipts for improvements, should be kept until you sell the property to accurately calculate the gain or loss from the sale.