The IRS allows certain deductions for rental property income and expenses. Special rules apply if the rental property is also used for personal reasons during the tax year. You are not allowed to take any deductions for personal use of the property. The IRS requires that you determine a percentage of personal use versus business use. That percentage is used to determine the income and expenses allowed as deductions.
According to IRS Publication 527, "a dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property." All structures or property that belong to the dwelling unit are also included. The IRS also states that, "a dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities."
Use As a Home
A dwelling unit is considered to be used as a home during the tax year if it is used for personal reasons for more than 14 days or 10 percent of the total days rented to others at a fair rental price, whichever is greater. A fair rental price is defined by the IRS as an amount an unrelated person would be willing to pay.
Personal use of a dwelling unit is defined by the IRS as any day that it is used by the following: any person who has an interest in it, unless that interest is rented to another owner as his primary home under a shared financing agreement; any family member of the owner or of another person who owns an interest in it, unless the family member uses the unit as his main home and pays a fair rental price; anyone with whom you have an agreement that allows you to use another dwelling unit; and anyone paying less than a fair rental price.
According to IRS Publication 527, "a shared financing agreement is one in which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners."
Donating the use of your property is considered using it for personal purposes if all three of the following criteria are met: you donate its use to a charitable organization, the organization then sells the use of the property as a fundraiser, and it is then used by the purchaser.
If you used your home for both personal and rental purposes, you must figure the percentage of total days the home was used for each. Multiply the percentage used for rental purposes and the amount of total expenses to determine the portion you can deduct. Rental expenses cannot be deducted in excess of gross rental income. Mortgage interest, property taxes and casualty losses may still be deductible on Schedule A.
Do not report any rental income or deduct any rental expenses if you use a dwelling as your home and rent it for fewer than 15 days. Do report rental income, but do not deduct any rental expenses if part of your home is rented to your employer to provide services to your employer in that rented space.
Lara Lawrence has been writing professionally since 2008, with articles appearing in “The Pioneer East." Lawrence is a professional pianist and has been teaching piano for more than 20 years. She is a member of the National Federation of Music Clubs and holds a Bachelor of Science in business administration from Central Michigan University.