 Most of this information comes from Publication 527 residential rental property including rental of vacation homes taxured 2022 you can find on the IRS website irs.gov irs.gov looking at the income tax formula we're focused online one income remember on the first half of the income tax formula is in essence and income statement although just an outline other forms and schedules flowing into these line items one of those the schedule e in essence and income statement in and of itself with rental income minus rental expenses the net rental income flowing into line one income of our income tax formula remember that when we're thinking about rental property as when we're thinking about kind of business activities in general we would like to be parsing out separating the personal from the business because that helps us to better be able to do the bookkeeping as well as make decisions and budgets out into the future and of course do the tax preparation situation so we've taken a look at scenarios where we have rental property that's designated 100 percent as rental property then we want to consider those situations where we can't get around some of this co-mingling situation with the personal and the rental where we often have to think about how we're going to be breaking out personal and rental so we can properly allocate mainly the expenses is what we're focused on here because obviously the income we wouldn't have any income if it was personal we need to properly be breaking out the expenses between the rental and the personal okay personal use of dwelling unit including the vacation home when we think about personal use there's a couple scenarios we can be thinking of we might think of a situation where we have like a vacation home another piece of property not our primary residence that we rent for part of the year or possibly use personally for part of the year or we can think about a situation where we have a home or a place that we live in and we rent part of it out so now we have the fraction of the place that we rent out or a situation in which we have a conversion from personal property to the rental property so now we have a fraction of the year where it's personal versus business those are the general scenarios where we get this personal business scenario lined up here we're talking about the including of the vacation home situation so if you have any personal use of a dwelling unit including a vacation home that you rent you must divide your expenses between the rental use and personal use in general notice it says expenses here not the income obviously because the income is all from rental you wouldn't have any personal income so with the expenses of the income statement we need to be breaking out in general your rental expenses will be no more than your total expenses multiplied by the fraction the denominator of which is the total number of days the dwelling unit is used and the number of which is the total number of days actually rented at a fair rental price so we're going to have to be coming up with a ratio kind of analysis in order to be breaking out these expenses now you can imagine different ways to calculate that ratio which might be more or less fair or or advantageous for the renter so obviously we have to be in compliance with tax code on how to calculate the ratio only your rental expenses may be deducted on schedule e form 1040 some of your personal expenses may be deductible on schedule a form 1040 if you itemize your deductions we have a similar situation we saw in prior presentations where when we're talking about income taxes the natural thing that we would expect to be able to deduct are those expenses we need in order to and to generate the revenue so we don't typically get to deduct personal expenses although there's exceptions of course the whole schedule a has it's full of exceptions to the general rule such as if it was your personal residence you might be able to deduct the mortgage interest for example and property taxes so here we're breaking it out we're going to be applying the portion that is appropriate to the schedule e being able to hopefully take the deduction on the schedule e and then the personal side the question is could you deduct it somewhere else like a schedule a you must also determine if the dwelling unit is considered a home the amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use there is a special rule if you use the dwelling unit as a home and you rented it for less than 15 days during the year so if you have a home and you you rent it for less than 15 days well that's you might consider that to be basically in material from the iris's perspective so so in that case you might not have to record the income or the expenses the idea from the iris perspective would probably be well if you only had 15 days of rental of the property it might be likely that you have a loss and the iris doesn't want you it'll allow you to to have a loss for this minimal amount of days because your expenses might be greater than the income that you got for you know 15 days so in any case dwelling unit a dwelling unit includes a house apartment condominium mobile home boat vacation home or similar property it also includes all structures or other property belonging to the dwelling unit a dwelling unit has basic living accommodations such as a sleeping space a toilet and a cooking facilities so it's pretty broad in spectrum here you got houses you got boats you got mobile homes but you got to have the general living things you need which is the toilet and the cooking facilities and the living accommodation so a dwelling unit doesn't include property or part of the property used solely as a hotel motel in or similar establishment property used solely as a hotel motel in or similar establishment if it is regularly available for occupancy by paying customers and isn't used by an owner as a home during the year example you rent a room in your home that is always available for short term occupancy by paying customers you don't use the room yourself and you allow only paying customers to use the room so now you've got your your room that you're renting out it's not for personal use you're breaking that part out from your personal usage you didn't use it during the year for personal the room is used solely as a hotel motel in or similar establishment and isn't a dwelling unit so in that case you're using it more as a hotel kind of situation than a dwelling unit in some of the the distinctions you might have or think about in a hotel or motel type of situation is that you are you're probably providing a substantial amount of services you know cleaning and and maintenance and that kind of stuff in the hotel as opposed to a traditional kind of renting situation where you're the primary activity might not be providing services cleaning and that kind of stuff but rather just the property itself being rented you know generating the money in more of a passive kind of situation