Many people who own vacation homes they no longer need or can afford are renting them out because they can’t sell them at a decent price, or sell them at all.

The tax treatment of the income and expenses from a vacation home depends on how much the owners use it. Things can get complicated if you spend time in your vacation home for part of the year and also rent it out.

Unfortunately for vacation homeowners, Congress has decided that they should not be allowed to deduct operating expenses and depreciation costs for the time they use a second home as a personal residence.

There are complicated tax rules homeowners must follow to ensure that they don’t deduct too much for their second home. If a home is used as both a rental property and a residence, these rules require that you allocate expenses between the two types of use. The rules differ depending on the amount of time the property is used as a rental and as a residence.

Limited rental

Your vacation home rental income is fully tax-free if you rent it out:

  • for no more than 14 days during the year; and
  • the home is used personally for 15 days or more.

That’s right — your rental income tax free. You can also deduct ordinary homeownership expenses, such as mortgage interest and real estate taxes. However, you can’t deduct any maintenance or other costs.

This rule can provide you with a real windfall if you own a vacation home in a desirable area where people are looking for short-term rentals.

Minimal personal use

Your vacation home is treated as investment property for tax purposes if you rent your vacation home for at least 15 days per year and make personal use of the property:

  • less than 15 days during the year; or
  • no more than 10 percent of the number of days during the year the property is rented for a fair rental.

You can deduct all of your rental expenses, subject to the passive loss rules.

More personal use

The final category is for vacation homeowners who rent their property 15 days or more during the year, but use it primarily as a residence. These homeowners get hammered by special vacation home tax rules. Your vacation home falls within this category if you rent it at least 15 days and it is used personally:

  • more than 14 days during the year; or
  • more than 10 percent of the number of days during the year the property is rented for a fair rental.

You are allowed to deduct, within strict limits, some rental expenses, such as maintenance, insurance, and depreciation. However, you can only deduct costs beyond the usual homeownership deductions to the extent of your rental income. If your expenses exceed your income, you may not deduct the loss from other income you earn that year.

If at all possible, you want to avoid flunking the 14-day/10 percent test. Keep careful track of how much time you spend at your vacation home. If you must spend more than 14 days at the home, it’s helpful to rent it out enough so you can remain within the 10 percent threshold.

Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.

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