What constitutes “personal use” for purposes of determining whether the expenses of a vacation rental home are deductible?
“Personal use” includes:
(1) use, for personal purposes, by the owner or by anyone who has an interest in the unit or by a brother, sister, spouse, ancestor, or lineal descendent of the owner or other person having an interest in the unit;
(2) use by a person under an arrangement that enables the owner to use some other unit whether or not the owner pays rent to use the other unit and regardless of the length of time the owner uses it; and
(3) use by any individual with rent set at less than fair rental value. Fair rental is determined by taking into account factors such as comparable rents in the area. This third requirement does not apply to an employee to whom the premises are furnished for the convenience of the employer, under IRC Section 119. Nonetheless, it has been held that days of rent-free use of units in a rental pool by prospective renters are not personal use days, where unit owners have no control over such use and the use was an ordinary and necessary business use. Where the owner of a vacation home donated a week’s use of the home to a charitable auction, the use of the home by the successful bidder was treated as personal use.
Use by the owner on any day on which the principal purpose of the use is to perform repair or maintenance work on the unit does not constitute personal use. Whether the principal purpose is to perform repair or maintenance work depends on all the facts and circumstances, including the amount of time devoted to repair and maintenance, the frequency of the use for repair and maintenance purposes during the tax year, and the presence and activities of companions. A day on which the taxpayer engages in repair or maintenance on a substantially full-time basis will not be considered a day of personal use by the taxpayer.
If a family member makes the unit rented a principal residence, it is not personal use by the owner. However, the preceding exception does not apply if the family member also has an interest in the dwelling unit unless the rental is pursuant to a “shared equity financing agreement.” A shared equity financing agreement is an agreement under which two or more persons acquire “qualified ownership interests” in a dwelling unit, and the person(s) holding one or more of such interests is entitled to occupy the dwelling unit for use as a principal residence, and is required to pay rent to one or more other persons holding qualified ownership interests in the dwelling unit. A qualified ownership interest is an undivided interest for more than fifty years in the dwelling unit and appurtenant land being acquired in the transaction to which the shared equity financing agreement relates.
A dwelling unit subject to these rules includes a house, apartment, condominium, mobile home, boat, or similar property that provides basic living accommodations such as sleeping space, toilet, and cooking facilities.
Are investments in real estate subject to the passive loss rules? How do the passive loss rules impact an investor in real estate?
Rental real estate activities will generally be considered passive activities subject to the passive loss rules. However, if the personal use of a residence that is also rented out exceeds fourteen days or, if greater, 10 percent of the rental days, the rental activity is not treated as a passive activity. In addition, a real property business of a taxpayer is not automatically considered a rental activity subject to the passive loss rules for a taxable year if during the year (1) more than one-half of the personal services performed by the taxpayer in trades or businesses during the year is in real property trades or businesses in which the taxpayer materially participates, and (2) the taxpayer performs more than 750 hours of service during the year in such real property trades or businesses. Few investors, for example, in real estate syndications will qualify for this exception.