Primarily Rental Use

Rental of Vacation Homes

Restrictions on the deductions allowed for party- year rentals of personal vacation homes were written into the law to prevent taxpayers from deducting essentially personal expenses as rental losses. Many taxpayers who own a second home had formerly treated the home as a rental property and generated rental losses as deductions. Section 280A eliminates that treatment by allowing deductions on residences used primarily for personal use only to the extent of the income generated. Only a break- even situation is allowed, no loss can be deducted. Those establishments primarily engaged in renting or leasing equipment with operators are classified in various subsectors of NAICS depending on the nature of the services provided.

The net income from rental property is taxable. In most cases, rental income is reported with the related expenses in Part 1 of schedule E. If services are provided to the tenant beyond those that are customarily provided, such as cleaning and maid services, the income is reported in Schedule C and is subject to the self- employment tax. Expenditures deductible as rental expenses include real estate taxes, mortgage interest, insurance, commissions, repairs and depreciation. There are 5 main types of business activity among brokers of real estate and property managers in this context which should be considered.

 If the rental property is a vacation home, the taxability of rental income and the deduction of expenses depend on whether the property is classified as a primarily personal- use, primarily- rental use property or rental property.

To prevent taxpayers from claiming a deduction for expenses effectively personal in nature associated with personal residence, the tax law limits the deductions a taxpayer can claim for expenses associated with a vacation home.  

 Primarily personal- use property

Primarily personal- use property is a residence that is rented for less than 15 days during the year. Essentially the rental period is disregarded and it is treated as a personal residence for tax purposes.  

Primarily rental- use property

Primarily rental- use property is when the residence is rented for less or more than 15 days and is used for personal purposes for not more than 14 days or 10% of the days rented. Essentially the residence is treated as rental property. The expenses must be then allocated between the personal and rental days and if the rental expenses exceed the rental income, the loss resulting would be deducted against the other income, subject to the passive rules.

Questions:

• What is rental vacation of homes?
• What is primarily personal- use property and primarily rental- use property?