Special rules limit the amount of rental expense deductions that may be taken by an investor taxpayer on a residence that is rented out for part of a year and used for personal purposes during other parts of the year according to Code Section 280A.
Number of Days in Use
If a personal residence is rented out for less than 15 days during the year, any rental income received is excluded from gross income and no rental expense deductions are allowed. However, regular expense deductions attributable to all personal residences are still available. If a residence is rented out during the year for more than 14 days, then the property will either be a personal residence, or a rental property (which could provide a deductible loss subject to the passive loss rules).
A vacation home becomes a personal residence when its owner uses it excessively for personal purposes. Excessive personal use is measured by the greater or 14 days or 10 percent of the number of rental days. This means, if the owner personally uses the residence more than the greater or 14 days or 10 percent of rental days, then the dwelling will be a personal residence and rental losses are not deductible.
If rental expenses exceed rental income, then regular expenses (mortgage interest, property taxes, and casualty losses) are deducted first. Any remaining regular expenses are deductible as itemized deductions. Other rental expense deductions are limited to the remaining amount of rental income.
However, if an individual rents out a vacation home for more than 14 days and does not use it excessively for personal purposes, then it will be treated as rental property. That is, if the taxpayer does not use it for personal purposes for the greater of 14 days or 10 percent of rental days, then losses are allowed to be deducted for AGI (subject to the passive activity rules). If an individual actively participates in the rental real estate activity, then up to $25,000 of losses can be used to offset non-passive income.