 Income tax 2021-2022. Personal use of dwelling unit including vacation home part number one. Get ready to get refunds to the max diving into income tax 2021-2022. Most of this information can be found in publication 527 residential rental property tax year 2021 IRS website irs.gov irs.gov. The income tax formula focused in online one income. We would have a sub schedule basically income and expenses and income statement. The expenses basically being deductions. The net then is what rolls in to line one income on the income tax formula as well as eventually page one of the form 1040. This is the schedule e basically the income statement schedule the supplemental income and laws we're focusing in on the rental real estate. Personal use of dwelling unit including the vacation home so we've got another kind of situation where we've got the rental property. But if it's commingled in some ways to our personal side of things such as having personal use in something like a vacation home which we might also use for some other reasons such as such as rental property. That's when it gets a bit confusing again to try to differentiate mostly the expenses to things that might be deductible as rental expenses versus kind of personal items which generally are not deductible when we're thinking about it from an income tax perspective. Remembering the general rule that you would expect in an income tax things to be deductible if they were used in order to generate revenue personal then expenses not typically the items we would expect to be deductible. Okay so if you have any personal use of a dwelling unit including a vacation home that you rent you must divide your expenses between rental use and personal use. Notice again we're focusing in on the expenses you might say hey there's an income statement why don't I do it with the income as well because the income only came from the rental part. Like it's not like you got the income you didn't pay yourself income from the personal parts you don't have the problem with the income side of things you do have the problem with the expense side of things because there's some expenses that are for the property as a whole that now needs to be allocated between personal use and rental use. So as in general your rental expenses will be no more than your total expenses multiplied by a fraction so of course the problem is how are we going to calculate that fraction. And obviously from the rental side of things from our side of things from the taxpayer side of things we would like to categorize more things to the rental property because that's the deductible side of things as opposed to the personal side. Which is non deductible but we want to be in compliance as we do so with the IRS code so that's the mindset that we're thinking from the denominator of which is the total number of days the dwelling unit is used so the total number of days used notice they didn't say on the denominator. The total number of days like in a year they said the denominator the total number of days used and the numerator of which is the total number of days actually rented at a fair rental price. So only your rental expenses may be deducted on schedule e form 1040 some of your personal expenses may be deducted deductible on schedule a form 1040 if you're itemizing your deduction so we've got that same kind of situation we looked at when we were thinking about basically selling or changing a property to rental property in the middle of the year or in a situation where you rent part of the property like your home and you rent part of it out where you've got that allocation method. Some of those items might still be deductible on the schedule a if you itemize those specifically coming to mind would be the interest on the mortgage for example might be something you could split between e and a and the other being the other being the property taxes so that you have that same kind of thing and then other things that are specific just to the rental property which doesn't aren't typically deductible on the personal side that's when we're really leaning towards we would like it to be deductible on the rental property otherwise we're not going to get the deduction. So 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. So now we've got to think about it is it a home or not and we can think that we've got to determine the use days of the dwelling unit to determine if it is a home. 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 dwelling unit. The dwelling unit includes a house apartment condominium mobile home boat vacation home or similar properties so pretty expansive dwelling unit if it's got the stuff you need for a dwelling unit like a kitchen and a toilet. You know you might be able to qualify it seems pretty pretty wide range there of dwelling units so it also includes all structures or other property belonging to the dwelling unit a dwelling unit has basic living accommodations including a sleeping space. There's a toilet and cooking facilities even if they're all squished together in like the same area. You know you're okay. Any case a dwelling unit doesn't include property or part of the property used solely as a hotel motel in or similar establishment properties used solely as a hotel motel in or similar establishment if it is regularly available for occupancy by paying customers and isn't 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. This room is used solely as a hotel motel in or similar establishment and isn't a dwelling unit dividing expenses. If you use a dwelling unit for both rental and personal purposes divide your expenses between the rental use and the personal use based on the number of days used for each purpose when dividing your expenses follow these rules. Okay here's the rules any day that the unit is rented at a fair rental price is a day of rent rental use even if you use the unit for personal purposes that day. So now you've got your rented it out even if you had some use on the personal side you rented it so that they're saying that counts as the rental day. This rule doesn't apply when determining whether you use the unit as a home. Okay so any day that the unit is available for rent but not actually rented isn't a day of rental use. Now notice that second one kind of leans toward favoring the government side of things and it's going to lower the amount of deductibility because we would like to say hey look I had it up for rent. I had it available for rent I was advertising for it so I should be able to include that in my rental day portion but they're saying no the days that you actually rented it. So that's going to lessen the fraction on the negative side to us so once again any day that the unit is available for rent but not actually rented isn't a day of rental use. Fair rental price so what does that mean? Well if you rented it to your cousin for like $2 you know you're probably not that's probably not like a fair price or like so any case because it has to be an arms links type of transaction. So a fair rental price for the property is generally the amount of rent that a person who isn't related to you would be willing to pay. I would have charged the any case the rent you charge isn't a fair rental price if it is substantially less than the rents charge for other properties that are similar to your property in your area. So if you go if you go hang out there and you say it's not it's just not a personal dwelling unit at this point in time because my cousins here hanging out and I charged him like $2 for it so it counts as a rental unit day. At that time so that no because that's not a fair rental unit when the rental price if you sold it to someone else and you weren't there would be like you know $10,000 or something. The $2 you see there's that doesn't the iris isn't going to buy that so ask yourself the following questions when comparing another property with yours is it used for the same purpose. So now we got to think about well how do I come up with a fair price because what if I am renting it you know and just to somebody I want to I got to determine what a fair price is so we could say we could try to compare it to other property. Even though my property is totally unique there's no property like my property. So but in any case is it approximately the same size is it in approximately the same condition doesn't have similar furnishing. If any of the answers are no the properties probably aren't similar example. So your beach cottage my good old beach cottage is beautiful was available for rent from June 1 through August 31 92 days except for the first week in August seven days when you were unable to find a renter you rented the college at a fair rental price during that time. The person who rented the cottage for only for July allowed to use it over the weekend two days without any reduction in or refund of rent. Your family also use the cottage during the last two weeks of May 14 days the cottage wasn't used at all before May 17 or after August 31. So you figure the part of the cottage expenses to treat as rental expenses as follows. So here we go the college was used for rentals for rental a total of 85 days that's the 92 days minus seven the days it was available for rent but not rented seven days aren't days of rental use. So again that's that cuts kind of against us because it wasn't actually rented but it was kind of held out for rental at that time. The July weekend two days you used it is rental is rental use because you received a fair rental price for the weekend. So you use the cottage for personal purposes for 14 days the last two weeks in May the total use of the cottage was 99 days 14 days personal use and 85 days rental use. So notice we're talking days of use here we're not talking like the entire year we're not pulling 360 or 365 your rental expense are 85 divided by the 99. So that would be the 85 days that we are charged to the to the rental use divided by the total number of days that we calculated. There's our ratio calculation. Now notice a couple other ways you might imagine doing this just to see the differences. You might say you might say well wouldn't wouldn't I what if I what if I did it this way which would be worse. We'd say OK if I rented it out for the the 85 days then what if I took the 85 divided by 360 I'll just take 360 12 times 30 the number of days in a year if we rounded to 30 day 30 day months. That would be 20 23 percent rental which would be worse but you could also think of a way it would be better. You can say well look if I only rented it if I only used it myself for 14 days then all the rest of the time it was basically rental properties. So you might say I should be able to calculate it this way 14 days personal use divided by 360 that would be that would be my personal use minus one. So my rental use would be 96 if I calculated it that way. So you can you can imagine how people could try to to try to skew the ratio and they can argument that seems you know it could be somewhat of a fair argument still. But you got to follow of course the rules for the I for the code to do that. So note when determining whether you use the cottage as a home the July weekend two days you used it is considered personal use even though you received a fair rental price for the weekend. Therefore you had 16 days of personal use in 83 days of rental use for this purpose because you use the cottage for personal purposes more than 14 days and more than 10 percent of the days of rental use eight days. You used it as a home if you have a have a net loss you may not be able to deduct all of the rental expenses. So now if it's if it's a home now you get this issue with the losses again and you know how the IRS is with the losses. So then you can see more information with that for the dwelling unit used as a home and we'll take a look at that later. So dwelling unit uses a home. Here we go. If you use a dwelling unit for both rental and personal purposes the tax treatment of the rental expenses you figure earlier under dwelling expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. So you use the dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of one 14 days or two 10 percent of the total days it is rented to others at a fair rental price. So it's the greater of these two. So see what is a day of personal use later if a dwelling unit is used for personal purposes on a day it is rented at a fair rental price discussed earlier. So don't count that day as a day of rental use and applying to above instead count it as a day of personal use and applying both one and two above. OK so what is a day of personal use a day of personal use of the dwelling unit is any day that the unit is used by any of the following persons. Number one you or any other person who owns an interest in it unless you rent it to another owner as his or her main home under a shared equity financing agreement defined later. However see days used as a main home before or after renting later. Number two a member of your family or a member of the family of any other person who owns an interest in it unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Family includes your spouse brother and sisters half brothers and half sisters and sisters parents grandparents etc. and lineal descendants children grandchildren etc. Number three anyone under an arrangement that lets you use some other dwelling unit. Number four anyone anyone at less than fair rental price. So you know if you got these people in there the general ideas is going to be the personal day use and count towards that personal day type of calculation. So main home if the other person or member of the family and one or two has more than one home his or her main home is ordinarily the one he or she lived in most of the time. So now you got your main home that's going to be important for some calculations shared equity financing arrangements. This is an agreement under 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-owners. Donation of use of the property so now if we have a donation kind of situation of the use of the property you use a dwelling unit for personal purposes if the organization sells the use of the unit at a fundraising event or and the purchase uses the purchaser uses the unit. So examples let's take a look at a few examples here could be could be quite helpful. The following examples show how to determine if you have days of personal use. So example number one you and your neighbor are co-owners of a condominium at the beach. So you got co-owners you got two individuals involved you and your neighbor. The last year you went to the unit to vacation to vacationers whenever possible the unit wasn't used as a main home by anyone. Your neighbor used a unit for two weeks last year. You didn't use it at all because your neighbor has an interest in the unit. Both of you are considered to have used the unit for personal purposes during those two weeks. Example number two you and your neighbor are co-owners of a house under a shared equity financing arrangement. Your neighbors live in the house and pay you a fair rental price. Even though your neighbors have an interest in the house the days your neighbors live there aren't counted as days of personal use by you. This is because your neighbors rent the house as their main home under a shared equity financing arrangement. Example number three you own a rental property. You own a rental property that you rent to your son. Your son doesn't own any interest in this property. He uses it as his main home and pays you a fair rental price. So it's your son but he's paying you a fair rental price. Not like $5 or anything. Your son's use of the personal of the property isn't personal use by you because your son is using it as his main home. He owns no interest in the property and he is paying you a fair rental price. Example number four you rent your beach house to Rosa. Rosa's nice. Rosa rents her cabin in the mountains to you so you got some kind of like an exchange thing happening here. You each pay a fair rental price. You are using your beach house for personal purposes on the days that Rosa uses it because your house is used by Rosa under an arrangement that allows you to use her cabin. Example number five you rent an apartment to your mother at less than fair rental price. So now you're renting to a relative but it's less than the fair rental price. You are using the apartment for personal purposes on the days that your mother rents it because you're rented for less than fair rental price. So if you're renting it to your mother but it's like for $5 or something like that then it's not a fair rental price.