Specialized Returns and Taxpayers · Rental property

Mixed used property/vacation home

A dwelling that is both lived in and let sits in one of three regimes, and the boundary between them is measured in nights. Cross one line and the rent disappears from income entirely. Cross the other and losses become unavailable, with deductions capped at the rent and the excess carried forward indefinitely. Counting days accurately is the whole of the work.

The rule

The starting prohibition (IRC § 280A(a), (b)). no deduction otherwise allowable is allowed to an individual or an S corporation with respect to the use of a dwelling unit used by the taxpayer during the taxable year as a residence, except as IRC § 280A itself provides; the bar does not reach deductions allowable without regard to any connection with a trade or business or income-producing activity, such as qualified residence interest and property taxes (IRC § 280A(a), (b))^TY2026 dwelling unit includes a house, apartment, condominium, mobile home, boat or similar property, together with all structures and other property appurtenant to it, but does not include any portion used exclusively as a hotel, motel, inn or similar establishment (IRC § 280A(f)(1))^TY2026

The line that matters. a taxpayer uses a dwelling unit as a residence for the year if personal use exceeds the greater of 14 days or 10 percent of the number of days the unit is rented at a fair rental during the year, and a day used for personal purposes is not counted as a day rented at a fair rental (IRC § 280A(d)(1))^TY2026 It is the greater of the two, so a unit rented 300 days at fair rental tolerates 30 days of personal use, while one rented 40 days tolerates only 14.

What counts as personal use. a day counts as personal use if for any part of it the unit is used by the taxpayer, by anyone else with an interest in it, or by a member of the family of either as defined in IRC § 267(c)(4); by anyone under a reciprocal arrangement letting the taxpayer use another dwelling unit; or by anyone else unless the unit is rented that day for what is on the facts a fair rental (IRC § 280A(d)(2))^TY2026 the Secretary is to prescribe when use for repairs and annual maintenance is not personal use, and may not treat a day as personal use merely because other individuals on the premises are not working, where the taxpayer is engaged in repair and maintenance substantially full time that day (IRC § 280A(d)(2))^TY2026 A day the owner’s brother stays free is personal use. A day the owner’s brother pays market rent is still personal use, because subparagraph (A) reaches family members regardless of what they pay — unlike subparagraph (C), which turns on fair rental.

Except when it is someone’s home. a rental arrangement is not personal use for any period during which the unit is rented at a fair rental to any person for use as that person’s principal residence — so letting a house to a child at market rent as their home does not taint the year (IRC § 280A(d)(3)(A))^TY2026

Two separate limits, applied in order. where an individual or S corporation uses a dwelling unit for personal purposes on any day in the year, whether or not it is used as a residence, deductions for expenses attributable to the rental may not exceed the proportion that the days rented at a fair rental bear to the total days the unit is used; the limit does not apply to deductions allowable whether or not the unit was rented (IRC § 280A(e))^TY2026 where the unit is used as a residence, deductions attributable to the rental use may not exceed the gross income from that use less the deductions allocable to it that are allowable whether or not the unit was so used, and less the deductions allocable to the activity but not to that use; the disallowed amount carries forward to the succeeding year and is subject to the same limit there, whether or not the unit is a residence in that later year (IRC § 280A(c)(5))^TY2026 The first apportions expenses by days; the second caps what survives at the rental income. Both can apply to the same year, and only the second produces a carryforward.

And the escape at the bottom. notwithstanding any other provision of IRC § 280A or IRC § 183, where a dwelling unit is used by the taxpayer as a residence and is actually rented for fewer than 15 days in the year, no deduction on account of the rental use is allowed and the rental income is excluded from gross income under IRC § 61 entirely (IRC § 280A(g))^TY2026 This is the only provision in the Code that makes income disappear because expenses are disallowed. It applies only where the unit is used as a residence and is rented fewer than 15 days.

A different limit for a different problem. where an activity of an individual or S corporation is not engaged in for profit, deductions are limited to those allowable without regard to profit motive, plus the deductions that would be allowable only if it were engaged in for profit, and those only to the extent gross income from the activity exceeds the first category (IRC § 183(a), (b))^TY2026 IRC § 183 addresses an activity with no profit motive; IRC § 280A addresses a dwelling with personal use. A property can be caught by either or both, and IRC § 280A(g) displaces IRC § 183 where it applies.

Current figures

How it works in practice

Build a day calendar before anything else, marking each day as rented at fair rental, personal, or neither. Days the property sits vacant and available are in neither column: they do not count as personal use, and they do not count as rental days for the IRC § 280A(e) fraction, whose denominator is days the unit is used rather than days in the year. Getting the denominator wrong is the single most common computational error in this area.

Then apply the residence test on the greater-of formula and see which regime the year falls into. Below 15 rental days with residence use, IRC § 280A(g) removes both the income and the deductions. Above that, with personal use over the threshold, deductions are apportioned and then capped at the rent. Above that with personal use under the threshold, it is an ordinary rental — a loss is possible, subject to IRC § 469.

Order the deductions correctly under the cap. IRC § 280A(c)(5) subtracts the deductions allowable whether or not the unit was rented before anything else, so mortgage interest and property tax allocable to the rental use come off the gross income first. What is left is available for operating expenses, and only after those is any depreciation allowed. Depreciation is therefore the item that is disallowed and carried forward, which is why a property under the cap year after year builds a suspended depreciation balance rather than losing the deduction outright.

Watch the family use rules in both directions. A week’s stay by the owner’s daughter is personal use even at full market rent, unless the property is her principal residence for that period under IRC § 280A(d)(3)(A). Conversely, days the owner spends there working substantially full time on repairs are not personal use, and the presence of non-working family members on those days does not change that.

How this has changed

IRC § 280A was added by the Tax Reform Act of 1976 in response to widely marketed schemes treating holiday homes as rental businesses. Its structure — a general disallowance, a set of exceptions and a gross income cap — has been stable since, with the significant later amendments directed at the home office rules in subsection (c)(1) rather than at vacation homes.

The one open question the statute never resolved is the allocation of mortgage interest and property tax between rental and personal use. The Service’s position, reflected in the instructions to Schedule E, allocates by rental days over total days used, consistent with IRC § 280A(e). The Ninth and Tenth Circuits held in Bolton and McKinney that interest and taxes should instead be allocated over the whole year, which leaves more of them in the rental column and more room under the cap for operating expenses and depreciation. The conflict has never been resolved by statute or by the Supreme Court, and the choice of method can change the result materially.

The Tax Cuts and Jobs Act changed the value of the personal half of the allocation without touching IRC § 280A itself. Capping the state and local tax deduction and limiting qualified residence interest to two residences made the personal share of those costs worth less, which increases the attraction of the court-approved allocation method for taxpayers within those circuits.

Short-term letting platforms have made the day-counting question far more common than it was, and have also raised a separate issue the section does not address: where substantial services are provided, the activity may be a trade or business outside the rental definition in IRC § 469 altogether, reported on Schedule C and subject to self-employment tax.

Exam focus

Know the residence test as the greater of 14 days or 10 percent of fair-rental days, and be ready to compute it. Expect a fact pattern that sits one day either side of the line.

Know that family use is personal use regardless of rent paid, subject only to the principal residence exception, and that a day is personal use if the unit is so used for any part of it.

Know the three regimes and their consequences: below 15 rental days, income excluded and deductions denied; residence use above that, apportionment then a gross income cap with a carryforward; no residence use, ordinary rental subject to IRC § 469. Know that depreciation is the last deduction under the cap and therefore the one suspended.

Check yourself

1. A cottage is rented at fair rental for 200 days and used personally for 19 days. Is it used as a residence?

Answer: No. The threshold is the greater of 14 days or 10 percent of 200 fair-rental days, which is 20. Personal use of 19 days does not exceed 20, so the cottage is not used as a residence, the IRC § 280A(c)(5) cap does not apply, and a rental loss is available subject to the passive activity rules. Expenses are still apportioned under IRC § 280A(e).

2. An owner rents her flat to her brother for a month at full market rent. He has his own home elsewhere. Is that personal use?

Answer: Yes. IRC § 280A(d)(2)(A) treats use by a member of the taxpayer’s family, as defined in IRC § 267(c)(4), as personal use, and brothers and sisters are within that definition. The rent paid is irrelevant to subparagraph (A). IRC § 280A(d)(3)(A) would rescue it only if the flat were his principal residence for the period, which it is not.

3. A property is rented 100 days, used personally 30 days, and vacant and advertised the rest of the year. What fraction of expenses is allocable to the rental under IRC § 280A(e)?

Answer: 100/130, or about 76.9 percent. The denominator is the total number of days the unit is used, which is 130, not 365 and not 235. The vacant days are in neither the numerator nor the denominator. Note that the Bolton line of cases would allocate interest and taxes over 365 days instead, which is a different question from this one.

4. A residence is rented for 14 days for $22,000. What is reported?

Answer: Nothing. IRC § 280A(g) applies where a dwelling unit used by the taxpayer as a residence is actually rented for fewer than 15 days: the rental income is excluded from gross income and no deduction attributable to the rental use is allowed. Fourteen is fewer than fifteen. A fifteenth day would bring the entire amount into income.

5. A vacation home under the gross income cap has $18,000 of rent, $12,000 of allocable interest and tax, $9,000 of operating expenses and $7,000 of allocable depreciation. What is deductible?

Answer: $12,000 of interest and tax first, leaving $6,000. Then operating expenses up to that amount, so $6,000 of the $9,000. Nothing remains, so none of the depreciation is allowed and no further operating expense is either. The disallowed $3,000 of operating expense and $7,000 of depreciation carry forward under IRC § 280A(c)(5) to the succeeding year, where the same cap applies again.