7797 / Are the expenses of a vacation rental home deductible if the owner’s personal use of the property exceeds fourteen days or 10 percent of rental days?

Where, because of the limit, not all deductions are allowed, deductions are allowable in the following order: (1) allocable amounts of expenses that are deductible without regard to rental use (such as mortgage interest and real estate taxes); (2) allocable amounts of deductions allowable because of rental use but that do not result in adjustment to basis; (3) allocable amounts of deductions that would result in an adjustment to basis (such as depreciation).⁴

Example: Mr. Jones owns a summer home that he uses for 30 days and rents to Mr. Green for 60 days for $2,000; it is vacant for the remainder of the year. Advertising and realtor’s fees total $100; taxes, $600; interest, $900; utilities, $300; maintenance, $600; insurance, $150; depreciation, $2,400. He calculates his deduction as follows:

	IRS rule	Bolton rule
gross receipts from rental	$2,000	$2,000
less: unallocated expenses to procure tenant	(100)	(100)
limitation on deductions	$1,900	$1,900
less: taxes and interest for rental period
(2/3 × ($600 + $900))	(1,000)
(2/12 × ($600 + $900))		(250)
	$900	$1,650
less: maintenance, insurance and utilities ($1,050) portion allocable to rental period (2/3 × $1,050)	(700)	(700)
	$ 200	$ 950
depreciation $2,400 portion allocable to rental period (2/3 × $2,400)	$1,600	$1,600

Using the IRS rule, Mr. Jones may deduct all allocable expenses except $1,400 of depreciation. Using the Bolton rule, Mr. Jones may deduct all allocable expenses except $650 of depreciation.

In determining whether personal use exceeds 10 percent of the number of days a unit in a rental pool is rented at fair rental, only the days the units are actually rented are counted; days when the units are merely held out for rent or are used rent-free for business purposes cannot be included.⁵

If the personal use of a residence that is also rented out exceeds the greater of 14 days or 10 percent of the rental days, the rental activity is not treated as a passive activity for such year. See Q 7793. Deductions from such a residence are subject to limitation under the rules above, and any income, gain, loss, or deduction from the residence is not taken into account under the passive loss rules for the year.⁶ However, such a residence may constitute a “qualified residence” for purposes of the deduction of mortgage interest. See Q 8032.