Owning a rental property has many advantages including income generation, tax benefits, and accessibility to personal use of rental property. You must be aware that the IRS has set forth guidelines that require you to limit yourself to 14 days you can use the property for personal use.
You’ll want to pay close attention to all tax rules to avoid costly surprises during the filing season. The IRS determines how you will be taxed if you are using rental property for personal use.
Tax Benefits of a Rental Property
When you receive income from renting your property, you are able to deduct some expenses such as:
- Interest paid on the mortgage
- Maintenance
- Insurance
- Utilities
- Casualty losses
- Real estate taxes
- Depreciation
This is a great advantage because these deductions significantly decrease the amount of rental income to be taxed. When you rent with the purpose to make a profit and don’t use the property as your residence, it leads to having higher deductible rental expenses compared to the gross rental income you receive.
Can I Use My Rental Property For Personal Use?
Yes, you’ll have tax advantages of owning a rental property as long as you abide by the tax rules. When you use one of your rental properties for personal use, the rental expenses you are able to deduct may be limited.
You may use your property during the tax year for personal use as long as it does not exceed 14 days or 10% of the total days you rent it at a fair market price.
Another consideration to understand that the IRS implements is the following example:
If you live in your main residence 11 months out of the year and your rental property for the other one month of the year, your rental property will be considered another residence unless it is rented at a fair market price for at least 300 days during the same calendar year.
Can you stay in your own rental property? Absolutely, as long as you do it correctly, you and your family will be able to enjoy your rental property while still benefiting from all the tax breaks.
Rental property with personal use falls under one of these categories:
- You or anyone else that has an interest in the property occupies it. If you have joint ownership, you may rent your interest to the other proprietor to use as a residence paying a fair market rental price. For this scenario, a shared equity financing agreement must be in place.
- A family member of yours or any person that has an interest in the property, except if that family member pays a fair market rental price and uses the property as their main residence.
- A person that uses the unit as their main residence but does not pay a fair rental market price.
- A person who has an agreement with you or another person that has an interest in the property in exchange for using their dwelling.
Keeping Track of Expenses
Since you can only deduct rental expenses, it is important for you to keep accurate numbers if you plan to use your rental property for personal use.
The IRS requests that you divide the property’s total expenses between the number of days used for personal and rental purposes.
The amount of total rental expenses you can deduct cannot exceed the gross rental income limit, which factors in the gross rental income minus the rental mortgage interest, casualty losses, realtor and advertising fees, and real estate taxes.
An exceptional advantage is that the IRS allows you to carry forward some rental expenses to the following year granted you stay under the gross rental income limit.
In the case of a federally declared disaster, you will also be able to deduct the personal portion of these expenses.
Remember Your Local and State Tax Laws
Be sure to consult a local tax expert as each state has its unique tax rules that apply to rental properties. Even when it comes to short-term rentals, you may face hotel and sales taxes where your rental property is.
In addition to your local government and state laws, you must also become familiar with permits and HOA regulations that address rental properties.
Monitor Changes in Tax Laws
Be sure to stay current as tax laws change often and you are responsible for keeping up with the latest requirements. You certainly don’t want to misfile your taxes or lose out on any changes that may currently benefit you.
Working With a Tax Professional
Of course, taxes are best filed by an experienced real estate tax CPA that knows your region well. Investors benefit greatly from hiring knowledgeable experts and avoiding costly mistakes.
There are many reputable CPAs that specialize in helping real estate investors during tax season and help you understand tax rules for vacation rental property.
Using a Property Management Company
When it comes to filing your taxes, a property management company makes your life much easier! They keep track of how your property is used and provide you with all the details your tax professional requires to prepare a complete filing.
Your property management company will give you a detailed document that shows exactly how your property was used throughout the year. They are familiar with the tax documents required to file your return properly and do it diligently each year.
This is another one of the many advantages of using a property management company to look after your rental unit.
Preparing For Tax Season
Even if you are working with a tax professional, it is a good idea to become familiar with the forms you will be filling out. Generally, rental properties that generate rental income for greater than 14 days per year use Schedule E to file at the same time you do your income tax filing.
Keep the following five steps in mind when preparing to file your taxes:
- Include 100% of the rental income you collected that year on Form 1040, Schedule E.
- Also on Schedule E, include 100% of expenses used for the rental property such as realtor, advertising, and management fees.
- Divide property taxes and mortgage interest between the number of days used for personal and rental purposes and report on Schedule E as “rental expenses.”
- The amount of net rental income, if any, from step 3 can be deducted as indirect expenses. These include items such as depreciation, insurance, utilities, maintenance, and others.
- Finally, on Form 1040, you can use Schedule A to deduct the personal portion of property taxes and mortgage interest expenses.
Will Having a Rental Property Help With Taxes?
Yes, having a rental property will absolutely help your finances. It is a smart financial decision because vacation rentals are granted many tax breaks that lighten your load as an owner.
You will be able to actively earn income and build equity while allowing tax laws to work to your advantage. There are many smart and creative deductions that can make a positive impact on your bottom line as long as you follow the 10% or 14-day rental rule of occupancy.
Recap of 3 General IRS Rules You Must Follow
- You don’t have to report rental income on your returns if you rent your property for 14 days or less throughout the year.
- You will be able to deduct losses and rental expenses as long as you don’t use the property more than 10% of the days it is rented or no more than 14 days. Otherwise, it will be considered a personal residence.
- Personal use is a broad term, you must include individuals who have an interest, family members, and those who are not paying rent at a fair market price.
My Final Thoughts On How Many Days Can I Use My Rental Property For Personal Use
So, what is considered personal use of rental property? The short answer is 14 days or 10% of the days it is rented at a fair market price.
You may feel that tax law can become complicated, especially if you are new to this. A creative CPA that knows vastly about real estate will help guide you with ease. Tax filing is something that you want to keep impeccable as a real estate investor.
Of course, if you are good at reading tax laws and have the knowledge to file correctly, following the five steps above serves as a good basis to get started.
Comment below and share any of your experiences as a real estate investor during tax season. Or, share any helpful comments, I would love to hear from you!
Thank you and have a great day.
