Renting Out Your Vacation Home: The 14-Day Rule and Personal Use

1. The three ways a vacation home is taxed

Section 280A sorts a home you both rent and use into one of three buckets, by two counts: the days it's rented at a fair price, and your personal days.

The residence test. You use a dwelling unit as a residence for the year if your personal days exceed the greater of 14 days or 10% of the days it's rented at a fair rental. A day you use the place, even one a guest paid for, doesn't count toward the rental days in that 10% figure. A "dwelling unit" includes a house, apartment, condominium or boat and everything that goes with it; only a portion used exclusively as a hotel, motel or inn is left out, and Publication 527 treats a property as used solely that way only if it's regularly available to paying customers and no owner uses it as a home during the year.

2. What counts as a personal day

A day is a personal day if, for any part of it, the unit is used by any of these (IRC 280A(d)(2) and Publication 527):

• You, or anyone else who owns an interest in the property. A co-owner's stay is a personal day for every owner.
• A member of your family, or of a co-owner's family: spouse, brothers and sisters (including half siblings), ancestors and lineal descendants. The exception is a relative who uses it as their main home and pays a fair rent.
• Anyone using it under an arrangement that lets you use some other dwelling, such as a swap, even if both sides pay rent.
• Anyone paying less than a fair rental price. Fair rental is roughly what an unrelated person would pay for a similar property nearby; rent substantially below that isn't fair rental.
• Anyone who uses it after you donate the use of it to a charity that sells it at a fundraiser.

Repair days. A day you spend working substantially full time repairing and maintaining (not improving) the property isn't a personal day, even if family members are there relaxing. The reverse doesn't work: a vacation day with a few hours of chores is still personal.

3. Splitting expenses between rental and personal days

Whenever there is any personal use during the year, whether or not it reaches the residence test, Section 280A(e) limits the rental expenses to the share that the fair-rental days bear to the total days the property was used. Two counting rules matter:

• Days it was available but not rented aren't rental days. They drop out of both the top and the bottom of the fraction.
• A day you use the property that a guest paid a fair rent for counts as a rental day for splitting expenses, but as a personal day for the residence test.

Expenses that are deductible anyway, like mortgage interest and property taxes if you itemize, aren't lost by the split: Section 280A(e) doesn't limit deductions you'd be allowed without the rental, so the personal share can still be deducted where it otherwise would be.

4. Where the seven-day short-term rental rule fits

The passive activity rules treat a rental activity as passive. But under Treasury Regulation 1.469-1T(e)(3)(ii)(A), an activity isn't a rental activity at all for a year in which the average period of customer use is seven days or less (or 30 days or less, if significant personal services come with the stay). The average is the total days of all guest stays divided by the number of stays (Treas. Reg. 1.469-1(e)(3)(iii)). That's what people call the short-term rental loophole, and it only pays off if you also materially participate under one of the seven tests in Temporary Treasury Regulation 1.469-5T(a), most often:

• More than 500 hours of participation in the year;
• Your participation is substantially all the participation of anyone, cleaners and managers included; or
• More than 100 hours, and not less than any other individual's.

Your spouse's hours count as yours. Participation can be proved by any reasonable means, including appointment books, calendars or narrative summaries, but a log kept as you go is far easier to defend. More on both tests: the short-term rental loophole, explained.

How personal use changes this. If the property is used as a residence under Section 280A and rented 15 days or more, Section 469(j)(10) says the income and deductions allocable to that use are left out of the passive activity rules for the year. The Section 280A cap governs instead: rental deductions can't exceed rental income, so there's no loss for the loophole to free up. An owner counting on short-term rental losses has to watch personal days as closely as guest stays and hours.

One more consequence of running the place like a hotel: Publication 527 says that if you provide substantial services primarily for guests' convenience, such as regular cleaning or changing linens during stays, the rental is reported on Schedule C rather than Schedule E, and self-employment tax may apply.

5. Depreciation basics for a rental condo or cabin

• Land isn't depreciable. When the price covers land and building, split it by their relative fair market values at purchase; only the building part is depreciated.
• Depreciation starts when the property is placed in service: ready and available for rent, not when the first guest arrives.
• Residential rental property is depreciated straight line over 27.5 years under the general system, with a mid-month convention.
• Depreciation is a rental expense like any other, so personal use shrinks it through the day-based split, and it counts toward the residence cap.

When a short-term rental may be treated differently. The Code defines residential rental property as a building where at least 80% of the gross rental income comes from dwelling units, and a dwelling unit there excludes a unit in a hotel, motel or other establishment more than half of whose units are used on a transient basis (IRC 168(e)(2)(A)). Real property that isn't residential rental property is generally nonresidential real property, recovered over 39 years. The Code doesn't spell out how a single vacation unit rented night by night fits those definitions, so it's a question to settle on the property's facts rather than assume. On a larger property, it's also worth asking whether a cost segregation study pays for itself.

6. How we help rental owners

We're a Louisville firm licensed in nine states, working with vacation rental owners wherever they live and wherever the property is, through a secure client portal. For a home you both rent and enjoy, that means counting the days before year-end, when there's still time to plan a stay around the residence test, and then splitting expenses, applying the right limit and depreciating the property correctly on the return. If the property is in South Carolina, Tennessee or North Carolina, the state guides cover the state and local taxes too.

7. Common questions