Many people rent out a second or vacation home to help offset the costs of ownership. But this enterprise does present special tax considerations.
If you rent your vacation home out for fewer than 15 days you do not have to report any of the rental income. This sounds like a good deal and sometimes it is but the downside is you also cannot deduct any expenses related to the rental. However, you are allowed to deduct mortgage interest and property taxes on a second home if you itemize deductions.
If you rent out the property for more than 14 days the next step is to determine how many days you used the property.
1) If any owner of the property uses it for any portion of a day that is counted as a day.
2) If any family member of a owner of the property uses it that is counted as a day.
3) Any day that the property is rented to someone for less than the FMV is also counted as a day. For example if you let a friend use the property.
If your vacation home is rented for more than 14 days and your personal use is greater than 14 days or 10% of the total days the property was rented then your deductions are limited to the gross rental income. Or in other words you are not allowed to claim a loss. You are allowed to carry any used losses forward and you are also allowed to deduct the personal use portion of mortgage interest and property taxes as an itemized deduction.
If your vacation home was used for personal purposes for less than the greater of 15 days or 10% of the total days it was rented it is considered a rental property and not a personal residence. If this is the case all normal deductions are allowed but the total loss may be limited by passive activity rules.
A few final points
1) A second or vacation home may also be a boat or motor home if it meets certain criteria.
2) If you rent to a relative or friend at a fair market value that does not count as personal use.
3) Time you spend in your second home for repairs do not count as personal days.
4) If the property is considered a rental property you may lose the personal use portion of mortgage interest.
5) If you rent you main home for less than 15 days you are also entitled to exclude the rent from your income.
6) As you can see these rules can be complicated but we are knowledgeable in the field and are available to help.