If you've recently purchased a vacation home, congratulations! You might be considering renting it out, in which case you'll want to be aware of some of the rules for deductibility.
General Rules
First, there are some general things to keep in mind when considering renting out your vacation home to tenants. First of all, any vacation home is considered a "dwelling unit" when it contains sleeping, cooking, and toilet facilities. This is true regardless of the form of the unit, and can apply to houses, condos, mobile homes, boats, and any other space that meets the criteria.
Further, the deductibility of expenses relating to the dwelling unit depends on the number of personal use days vs. rental days. These terms are pretty self-explanatory, but personal use days refer to days that the unit is in personal use for you or family/friends without charging any rental fees. Rental days, on the other hand, are days that the unit is rented out for a fee.
Expenses at the unit fall into two categories: Personal expenses and rental expenses. Personal expenses include items like mortgage interest, property taxes, and casualty losses, and are always allowable, with deductibility subject to other limitations. Rental expenses include items like maintenance, utilities, and insurance, and are only deductible to the extent that the unit is used for rental.
Key Limitations
There are some important limitations to rental home expense deductibility:
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Personal use test:
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If personal use exceeds the greater of 14 days or 10% of rental days, the property is treated as a residence.
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In that case, rental expenses are limited to gross rental income.
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Counting personal use:
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Any part of a day counts as personal use.
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Use by family, co-owners, or anyone paying less than fair rental value also counts as personal use.
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Time spent on repairs/maintenance does not count as personal use.
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Allocation:
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Rental expenses must be allocated between rental and personal use based on rental days divided by total days used.
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If treated as a residence, rental expenses cannot exceed gross rental income (with disallowed amounts carried forward).
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Next Steps
These rules can be complex, and the impact depends on your personal use and rental history. If you're considering renting out your vacation home, we can help. We'll review your circumstances and provide guidance on your rental property deductions as a part of our wider tax planning and preparation services.