Table of Contents
In chapter 1, we looked at the rules for residential rental activities where the rental dwelling unit was separate from where you lived. In this chapter, we are looking at rental activities where the same dwelling unit is used both as your home (or is considered to be your home) and as a rental. This might be a vacation home or your main home, a recreational vehicle or a boat. In this case, expenses must be divided between rental use and personal use, and you will not be able to deduct rental expenses that are more than your rental income for that dwelling unit.
A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons.
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You or any other person who owns an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined on this page). However, see Exception for Use as Main Home Before or After Renting under Dwelling Unit Used As a Home, later.
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A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price (defined on this page). Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
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Anyone under an arrangement that lets you use some other dwelling unit.
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Anyone at less than a fair rental price.
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You donate the use of the unit to a charitable organization,
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The organization sells the use of the unit at a fund-raising event, and
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The “purchaser” uses the unit.
Example 1.
You and your neighbor are co-owners of a condominium at the beach. Last year, you rented the unit to vacationers whenever possible. The unit was not used as a main home by anyone. Your neighbor used the unit for 2 weeks last year; you did not use it at all.
Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks.
Example 2.
You and your neighbors are co-owners of a house under a shared equity financing agreement. Your neighbors live in the house and pay you a fair rental price.
Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. This is because your neighbors rent the house as their main home under a shared equity financing agreement.
Example 3.
You own a rental property that you rent to your son. Your son does not own any interest in this property. He uses it as his main home and pays you a fair rental price.
Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price.
Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day.
Example.
Corey owns a cabin in the mountains that he rents for most of the year. He spends a week at the cabin with family members. Corey works on maintenance of the cabin 3 or 4 hours each day during the week and spends the rest of the time fishing, hiking, and relaxing. Corey's family members, however, work substantially full time on the cabin each day during the week. The main purpose of being at the cabin that week is to do maintenance work. Therefore, the use of the cabin during the week by Corey and his family will not be considered personal use by Corey.
The tax treatment of rental income and expenses for a dwelling unit that you also use for personal purposes depends on whether you use it as a home. (See Figuring Rental Income and Deductions, later in this chapter).
You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of:
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14 days, or
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10% of the total days it is rented to others at a fair rental price.
See What Is a Day of Personal Use, earlier on this page.
If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, do not count that day as a day of rental use in applying (2) above. Instead, count it as a day of personal use in applying both (1) and (2) above (see Example 3 under Fair rental price, next). However, this rule does not apply when dividing expenses between rental and personal use (see Dividing Expenses, later, for details).
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Is it used for the same purpose?
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Is it approximately the same size?
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Is it in approximately the same condition?
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Does it have similar furnishings?
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Is it in a similar location?
Example 1.
You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. You rented the basement apartment at a fair rental price to college students during the regular school year. You rented to them on a 9-month lease (273 days). You figured 10% of the total days rented to others at a fair rental price is 27 days.
During June (30 days), your brothers stayed with you and lived in the basement apartment rent free.
Your basement apartment was used as a home because you used it for personal purposes for 30 days. Rent-free use by your brothers is considered personal use. Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days).
Example 2.
You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. You figured 10% of the total days rented to others at a fair rental price is 3 days.
The room was used as a home because you used it for personal purposes for 21 days. That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days).
Example 3.
You own a condominium apartment in a resort area. You rented it at a fair rental price for a total of 170 days during the year. For 12 of these days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Your family actually used the apartment for 10 of those days. Therefore, the apartment is treated as having been rented for 160 (170 – 10) days. You figured 10% of the total days rented to others at a fair rental price is 16 days. Your family also used the apartment for 7 other days during the year.
You used the apartment as a home because you used it for personal purposes for 17 days. That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days).
Discussed below are exceptions to the rules for personal use of a rented dwelling unit.
If you use the dwelling unit as a home and you rent it fewer than 15 days during the year, that period is not treated as rental activity. Do not include any of the rent in your income and do not deduct any of the rental expenses. See Dwelling Unit Used as a Home, earlier.
For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Do not count them as days of personal use if:
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You rented or tried to rent the property for 12 or more consecutive months.
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You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property.
However, this special rule does not apply when dividing expenses between rental and personal use. See Property Changed to Rental Use in chapter 4.
Example 1.
On February 28, 2007, you moved out of the house you had lived in for 6 years because you accepted a job in another town. You rented your house at a fair rental price from March 15, 2007, to May 14, 2008 (14 months). On June 1, 2008, you moved back into your old house.
The days you used the house as your main home from January 1 to February 28, 2007, and from June 1 to December 31, 2008, are not counted as days of personal use. Therefore, you would use the rules in chapter 1 when figuring your rental income and expenses.
Example 2.
On January 31, you moved out of the condominium where you had lived for 3 years. You offered it for rent at a fair rental price beginning on February 1. You were unable to rent it until April. On September 15, you sold the condominium.
The days you used the condominium as your main home from January 1 to January 31 are not counted as days of personal use when determining whether you used it as a home.
If you use a dwelling unit as a home during the year, how you figure your rental income and deductions depends on how many days the unit was rented at a fair rental price.
If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose.
When dividing your expenses, follow these rules.
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Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. (This rule does not apply when determining whether you used the unit as a home.)
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Any day that the unit is available for rent but not actually rented is not a day of rental use.
Example.
Your beach cottage was available for rent from June 1 through August 31 (92 days). Your family used the cottage during the last 2 weeks in May (14 days). You were unable to find a renter for the first week in August (7 days). The person who rented the cottage for July allowed you to use it over a weekend (2 days) without any reduction in or refund of rent. The cottage was not used at all before May 17 or after August 31.
You figure the part of the cottage expenses to treat as rental expenses as follows.
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The cottage was used for rental a total of 85 days (92 − 7). The days it was available for rent but not rented (7 days) are not days of rental use. The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend.
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You used the cottage for personal purposes for 14 days (the last 2 weeks in May).
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The total use of the cottage was 99 days (14 days personal use + 85 days rental use).
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Your rental expenses are 85/99 (86%) of the cottage expenses.
When determining whether you used the cottage as a home, the July weekend (2 days) you used it is personal use even though you received a fair rental price for the weekend. Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. If you have a net loss, you may not be able to deduct all of the rental expenses. See Limit on Deductions, next.
The rental activity discussed in this chapter—using the same dwelling unit for both rental and personal purposes—is not a passive activity. Instead, the limitation is based on the rental income from this activity.
If your rental expenses are more than your rental income, you cannot use the excess expenses to offset income from other sources. The excess can be carried forward to the next year and treated as rental expenses for the same property. Any expenses carried forward to the next year will be subject to any limits that apply for that year. You can deduct the expenses carried over to a year only up to the amount of your rental income for that year, even if you do not use the property as your home for that year.
To figure your deductible rental expenses and any carryover to next year, use Worksheet 5-1 at the end of this chapter.
When you use a dwelling unit both as a home and a rental unit, expenses must be divided between rental use and personal use, and you will not be able to deduct rental expenses that are more than your rental income for that dwelling unit.
Use Worksheet 5-1 to divide your expenses between rental and personal use. Follow the rules listed in chapter 3 to report your rental income and deductions. Personal expenses are not deductible except in the case of certain items such as mortgage interest and real estate taxes, which can be deducted if you itemize your personal deductions on Schedule A. See the instructions for Schedule A for more information on deducting these expenses. If you cannot itemize your deductions, see Adding real estate taxes to standard deduction in chapter 4.
On June 1, Tim and Emily Donovan bought a vacation condominium to use as rental property. They began advertising in June that the property would be available for rent beginning July 1. The Donovans used the property for 10 days during June. They didn't have any tenants in July, so family and friends used it for the 15 days they weren't using the property themselves. On August 3, they began renting it for $300 per week (a fair rental price) and rented it continuously through December 20. They had no tenants for the rest of December, so the Donovans used the property for the rest of the year.
They had the following costs associated with the vacation property for the 7 months they owned it.
| Mortgage interest | $10,500 | ||
| Real estate taxes | 300 | ||
| Repairs | 400 | ||
| Fire insurance | 120 | ||
| Advertising | 150 |
The property was ready and available for rental use on July 1, so it was considered placed in service at that time. They figured $1,200 depreciation for the 6 months it was available for rent.
The Donovans answer “Yes” to each of the questions at the top of Worksheet 5-1 and continue to Part I.
The Donovans have entered the rental portion of their deductible expenses from Worksheet 5-1 on the appropriate lines of Schedule E (Form 1040), as follows.
| Line 5 | $ 150 | ||
| Line 12 | 7,665 | ||
| Line 16 | 219 |
Worksheet 5-1.Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home—Illustrated
Use this worksheet only if you answer “yes” to all of the following questions.
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| PART I.Rental Use Percentage | |||||
| A. | Total days available for rent at fair rental price | A. | 184 | ||
| B. | Total days available for rent (line A) but not rented | B. | 42 | ||
| C. | Total days of rental use. Subtract line B from line A | C. | 142 | ||
| D. | Total days of personal use (including days rented at less than fair rental price) | D. | 52 | ||
| E. | Total use of the property. Add lines C and D | E. | 194 | ||
| F. | Percentage of expenses allowed for rental. Divide line C by line E | F. | .73 | ||
| PART II.Allowable Rental Expenses | |||||
| 1. | Enter rents received | 1. | 6,000 | ||
| 2a. | Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) |
2a. | 7,665 | ||
| b. | Enter the rental portion of real estate taxes | b. | 219 | ||
| c. | Enter the rental portion of deductible casualty and theft losses (see instructions) | c. | |||
| d. | Enter direct rental expenses (see instructions) | d. | 150 | ||
| e. | Fully deductible rental expenses. Add lines 2a–2d. Enter here and on the appropriate lines on Schedule E (see instructions) |
2e. | 8,034 | ||
| 3. | Subtract line 2e from line 1. If zero or less, enter -0- | 3. | 0 | ||
| 4a. | Enter the rental portion of expenses directly related to operating or maintaining the dwelling unit (such as repairs, insurance, and utilities) |
4a. | 380 | ||
| b. | Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) |
b. | |||
| c. | Carryover of operating expenses from 2007 worksheet | c. | |||
| d. | Add lines 4a–4c | d. | 380 | ||
| e. | Allowable expenses. Enter the smaller of line 3 or line 4d (see instructions) | 4e. | 0 | ||
| 5. | Subtract line 4e from line 3. If zero or less, enter -0- | 5. | 0 | ||
| 6a. | Enter the rental portion of excess casualty and theft losses (see instructions) | 6a. | |||
| b. | Enter the rental portion of depreciation of the dwelling unit | b. | 876 | ||
| c. | Carryover of excess casualty losses and depreciation from 2007 worksheet | c. | |||
| d. | Add lines 6a–6c | d. | 876 | ||
| e. | Allowable excess casualty and theft losses and depreciation. Enter the smaller of line 5 or line 6d (see instructions) |
6e. | 0 | ||
| PART III. Carryover of Unallowed Expenses to Next Year | |||||
| 7a. | Operating expenses to be carried over to next year. Subtract line 4e from line 4d | 7a. | 380 | ||
| b. | Excess casualty and theft losses and depreciation to be carried over to next year. Subtract line 6e from line 6d |
b. | 876 | ||
Donovan Schedule E (Form 1040)
Worksheet 5-1.Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home
Use this worksheet only if you answer “yes” to all of the following questions.
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| PART I.Rental Use Percentage | |||||
| A. | Total days available for rent at fair rental price | A. | |||
| B. | Total days available for rent (line A) but not rented | B. | |||
| C. | Total days of rental use. Subtract line B from line A | C. | |||
| D. | Total days of personal use (including days rented at less than fair rental price) | D. | |||
| E. | Total use of the property. Add lines C and D | E. | |||
| F. | Percentage of expenses allowed for rental. Divide line C by line E | F. | . | ||
| PART II.Allowable Rental Expenses | |||||
| 1. | Enter rents received | 1. | |||
| 2a. | Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) |
2a. | |||
| b. | Enter the rental portion of real estate taxes | b. | |||
| c. | Enter the rental portion of deductible casualty and theft losses (see instructions) | c. | |||
| d. | Enter direct rental expenses (see instructions) | d. | |||
| e. | Fully deductible rental expenses. Add lines 2a–2d. Enter here and on the appropriate lines on Schedule E (see instructions) |
2e. | |||
| 3. | Subtract line 2e from line 1. If zero or less, enter -0- | 3. | |||
| 4a. | Enter the rental portion of expenses directly related to operating or maintaining the dwelling unit (such as repairs, insurance, and utilities) |
4a. | |||
| b. | Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) |
b. | |||
| c. | Carryover of operating expenses from 2007 worksheet | c. | |||
| d. | Add lines 4a–4c | d. | |||
| e. | Allowable expenses. Enter the smaller of line 3 or line 4d (see instructions) | 4e. | |||
| 5. | Subtract line 4e from line 3. If zero or less, enter -0- | 5. | |||
| 6a. | Enter the rental portion of excess casualty and theft losses (see instructions) | 6a. | |||
| b. | Enter the rental portion of depreciation of the dwelling unit | b. | |||
| c. | Carryover of excess casualty losses and depreciation from 2007 worksheet | c. | |||
| d. | Add lines 6a–6c | d. | |||
| e. | Allowable excess casualty and theft losses and depreciation. Enter the smaller of line 5 or line 6d (see instructions) |
6e. | |||
| PART III. Carryover of Unallowed Expenses to Next Year | |||||
| 7a. | Operating expenses to be carried over to next year. Subtract line 4e from line 4d | 7a. | |||
| b. | Excess casualty and theft losses and depreciation to be carried over to next year. Subtract line 6e from line 6d |
b. | |||
Worksheet 5-1 Instructions.Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home
| Caution. Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b
of Part II. |
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| Line 2a. | Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A (as if you were itemizing your deductions) if you had not rented the unit. Do not include interest on a loan that did not benefit the dwelling unit. For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Include the rental portion of this interest in the total you enter on line 2a of the worksheet. | |||
| Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A, if you had not rented the unit. See page A-4 of the Schedule A instructions. However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. See Line 4b below to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. | ||||
| Note. Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Instead, figure the personal portion on a separate Schedule A. If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. | ||||
| Line 2c. | Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A if you had not rented the dwelling unit. To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. On Form 4684, line 22, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Enter the rental portion of the result from Form 4684, line 24, on line 2c of this worksheet. | |||
| Note. Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Instead, figure the personal portion on a separate Form 4684. | ||||
| Line 2d. | Enter the total of your rental expenses that are directly related only to the rental activity. These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. | |||
| Line 2e. | You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. | |||
| Line 4b. | On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct
on Schedule A if you had not rented the dwelling unit. If you had additional mortgage interest and qualified mortgage insurance
premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet
the rental portion of those excess amounts. Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). |
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| Line 4e. | You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e.* | |||
| Line 6a. | To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. | |||
| A. | Enter the amount from Form 4684, line 10 | |||
| B. | Enter the rental portion of line A | |||
| C. | Enter the amount from line 2c of this worksheet | |||
| D. | Subtract line C from line B. Enter the result here and on line 6a of this worksheet | |||
| Line 6e. | You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e.* | |||
| *Allocating the limited deduction. If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. |
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