Are you the owner of a vacation home that you also rent out? If yes, then you should be aware of the IRS method for allocating vacation home expenses.
The Internal Revenue Service (IRS) has specific rules for allocating expenses between personal and rental use of vacation homes. In this article, we will discuss what exactly this method is and how it works.
What is a Vacation Home?
Firstly, let’s understand what the IRS considers a vacation home. It is a property that you own and use for personal purposes but also rent out to others. This can include houses, apartments, condominiums, mobile homes, boats or similar properties.
What is the IRS Method for Allocating Vacation Home Expenses?
When it comes to tax deductions related to your vacation home rental income, the IRS has set some guidelines on how to allocate expenses between personal and rental use. The method used to allocate these expenses is based on the number of days the property was used for personal use versus rental use.
Step 1: Determine Personal Use Days
Personal use days are any days that you or any other person who has an interest in your property uses it for personal reasons. These include days when you stay at your vacation home or when friends or family members stay there without paying rent.
Step 2: Determine Rental Use Days
Rental use days are any days when your property is rented out to someone else at a fair market value. This includes days when the property was rented out through any third-party platforms such as Airbnb or VRBO.
Step 3: Calculate Total Expenses
Once you have determined the number of days used for each purpose, you can calculate your total expenses incurred during the year. These expenses can include mortgage interest, property taxes, insurance premiums, repairs and maintenance costs, and depreciation.
Step 4: Allocate Expenses between Personal and Rental Use
After calculating your total expenses, you must allocate them between personal and rental use based on the number of days each was used. For example, if you used your vacation home for personal purposes for 100 days and rented it out for 265 days, then you can allocate 27% (100 divided by 365) of the expenses as personal use and the remaining 73% (265 divided by 365) as rental use.
Conclusion
In short, the IRS method for allocating vacation home expenses is a way to determine how much of your expenses can be deducted on your tax return based on the number of days your property was rented out versus used personally. It is essential to keep accurate records of all rental income and expenses throughout the year to ensure that you comply with IRS regulations. By following these guidelines, you can claim deductions on your tax return while enjoying your vacation home.