I just emailed a client with the answer to a question about deducting expenses for a “mixed use” vacation property, and thought it would be a good idea to post my answer here, considering we are in the height of the summer rental season:
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“Here is the word -
“Here is the word -
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In general expenses for a "mixed-use" property - i.e. both personal use and rental - are allocated based on the number of days used for each activity.
In general expenses for a "mixed-use" property - i.e. both personal use and rental - are allocated based on the number of days used for each activity.
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You take the number of days rented and divide this by the total number of rental and personal use days. For 2007 your property was rented for one week and had two weeks of personal use. So 1/3 of the operating expenses (7 days / 21 days) were deducted against the rental income.
You take the number of days rented and divide this by the total number of rental and personal use days. For 2007 your property was rented for one week and had two weeks of personal use. So 1/3 of the operating expenses (7 days / 21 days) were deducted against the rental income.
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An alternative method is used for deducting real estate taxes and mortgage interest. Since real estate taxes and mortgage interest "accrues" continuously throughout the year these expenses are deducted based on actual rental use as a factor of the entire 365 day year. Since you rented the property for only one week in 2007 we deducted 1/52 (1 week divided by 52 weeks) of the real estate taxes and mortgage interest against the rental income. The remaining 51/52 of real estate taxes and mortgage interest was deducted on your Schedule A.
An alternative method is used for deducting real estate taxes and mortgage interest. Since real estate taxes and mortgage interest "accrues" continuously throughout the year these expenses are deducted based on actual rental use as a factor of the entire 365 day year. Since you rented the property for only one week in 2007 we deducted 1/52 (1 week divided by 52 weeks) of the real estate taxes and mortgage interest against the rental income. The remaining 51/52 of real estate taxes and mortgage interest was deducted on your Schedule A.
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Of course expenses directly related to the rental use - such as commissions paid to rental agencies, any "merchant" license or registration fees, advertising, cleaning and maintenance before, after or between rentals and additional special "renter's" insurance - are 100% deductible.
Of course expenses directly related to the rental use - such as commissions paid to rental agencies, any "merchant" license or registration fees, advertising, cleaning and maintenance before, after or between rentals and additional special "renter's" insurance - are 100% deductible.
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When the personal use of a "mixed-use" vacation property exceeds the greater of 14 days or 10% of the days rented the property is considered to be primarily a "home" and deductible expenses are limited to rental income received. If you collect $1,000 in gross rent for the year your deductions are limited to $1,000. Unused expenses can be "carried over" to future years.
When the personal use of a "mixed-use" vacation property exceeds the greater of 14 days or 10% of the days rented the property is considered to be primarily a "home" and deductible expenses are limited to rental income received. If you collect $1,000 in gross rent for the year your deductions are limited to $1,000. Unused expenses can be "carried over" to future years.
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Rental expenses for a property considered to be primarily a home are deducted in the following order -
Rental expenses for a property considered to be primarily a home are deducted in the following order -
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First you deduct the allocated real estate taxes, mortgage interest, and casualty loss and direct expenses.
First you deduct the allocated real estate taxes, mortgage interest, and casualty loss and direct expenses.
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If the total of these deductions equals or exceeds the gross rental income then you must stop here. No other deductions are allowed.
If the total of these deductions equals or exceeds the gross rental income then you must stop here. No other deductions are allowed.
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If the total of these deductions is less than the gross rental income you next deduct allocated "operating expenses", such as insurance and utilities - up to the remaining amount of gross rental income.
If the total of these deductions is less than the gross rental income you next deduct allocated "operating expenses", such as insurance and utilities - up to the remaining amount of gross rental income.
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If there is any gross rental income remaining after deducting these two types of expenses then, and only then, can you deduct depreciation.
If there is any gross rental income remaining after deducting these two types of expenses then, and only then, can you deduct depreciation.
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In other words - while allocated real estate taxes, mortgage interest, and casualty loss and direct expenses can create a rental loss, allocated operating expenses and depreciation cannot create or increase a rental loss.
In other words - while allocated real estate taxes, mortgage interest, and casualty loss and direct expenses can create a rental loss, allocated operating expenses and depreciation cannot create or increase a rental loss.
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Days you spend at the property that are "substantially" used to clean, paint, or repair the property are not considered to be "personal days" for purposes of either the allocation percentages or determining if the property is primarily a home.
Days you spend at the property that are "substantially" used to clean, paint, or repair the property are not considered to be "personal days" for purposes of either the allocation percentages or determining if the property is primarily a home.
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Days used by or rented to family and friends are considered to be personal days, unless the rent paid is considered to be a "fair market" rent. This fair market rent can be less than the actual rent charged to "strangers", as the Tax Court has accepted that family and friends are expected to take "exceptionally good care" of the property and there are no commissions paid on the gross rent. A good number to use is 80% of what you would charge the "great unwashed masses".
Days used by or rented to family and friends are considered to be personal days, unless the rent paid is considered to be a "fair market" rent. This fair market rent can be less than the actual rent charged to "strangers", as the Tax Court has accepted that family and friends are expected to take "exceptionally good care" of the property and there are no commissions paid on the gross rent. A good number to use is 80% of what you would charge the "great unwashed masses".
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Got it?”
Got it?”
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TTFN
TTFN
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