Real Estate Tax Calc
Worked example: three outcomes from one beach house
Consider a beach house rented on a short-term basis with the following three fact patterns for the same calendar year. In each case, the house was vacant for additional days not shown.
Scenario A — below the residence threshold:
Fair rental days: 90 · Personal use days: 8 · Vacant: 267
Threshold test: greater of 14 days or 10% of 90 = 9 days. Personal use (8) < 9. Not a residence. Rental expenses (including depreciation) reduce rental income, and any remaining loss is potentially deductible against other income (subject to passive activity rules).
Scenario B — residence threshold triggered:
Fair rental days: 90 · Personal use days: 15 · Vacant: 260
Threshold test: greater of 14 or 9 = 14 days. Personal use (15) > 14. Residence under § 280A. Rental expenses are capped at rental income. No loss allowed. No carryforward.
Scenario C — Augusta Rule (no Schedule E):
Fair rental days: 14 or fewer · Personal use days: any
Rental income is excluded from gross income under IRC § 280A(g). No Schedule E. No rental deductions. Mortgage interest and property taxes remain available as itemized deductions on Schedule A.
Which days count as fair rental days
A day is a fair rental day only when a tenant actually occupies the property and pays fair market rent. Days when the property is:
- Listed but vacant — not a fair rental day and not a personal use day
- Occupied by a family member at below-market rent — personal use day, not a rental day
- Occupied by a family member at full market rent — fair rental day (family member paying market rent is treated as an arm's-length tenant)
- Used under a reciprocal arrangement (you rent from someone else in exchange) — personal use day
- Used for maintenance only — neither rental nor personal use day
For Airbnb or VRBO properties where guests book individual nights, count each guest-occupied night as one fair rental day. A checkout day and a check-in day for back-to-back bookings each count as one day (the guest who departed was there at the start of the day; the guest who arrived was there at the end).
Filling in Schedule E, Part I
Schedule E, Part I has columns for each rental property. The key boxes for a mixed-use vacation home:
- Line 2 (Fair rental days): Enter the total fair rental days for the year. This is your guest-occupied days at market rent.
- Line 2 (Personal use days): Enter total personal use days. This triggers the § 280A residence test.
- Line 3 (Type of property): Code 6 for vacation/short-term rental.
- Lines 4–20 (Income and expenses): Report rental income on line 3, then expenses. For a residence-status property, total expenses on lines 5–19 cannot exceed rental income less deductible interest and taxes already allocated.
If the property is a residence (personal use exceeds the threshold), the IRS requires you to use the ratio rental days ÷ total days used to allocate shared expenses. Vacant days are excluded from the denominator — only days of actual use (rental + personal) go in the bottom.
Expense allocation: the IRS method
When the vacation home is a residence, all expenses that benefit both rental and personal use must be prorated. The IRS-prescribed ratio is:
Rental percentage = fair rental days ÷ (fair rental days + personal use days)
Using Scenario B numbers (90 rental, 15 personal): 90 ÷ 105 = 85.7% rental allocation.
Apply this percentage to operating expenses — insurance, utilities, HOA fees, repairs, management fees. Mortgage interest and property taxes are handled separately: the rental portion (85.7%) goes on Schedule E; the personal portion goes on Schedule A as itemized deductions.
Depreciation is also prorated by the rental percentage. For a property classified as a residence, claim only 85.7% of annual depreciation on Schedule E. The remaining 14.3% is simply not deductible — it is not added to the personal Schedule A deductions.
The ordering rule when expenses exceed rental income
When the vacation home is a residence and total expenses exceed rental income, the IRS imposes a specific deduction order (under § 280A(c)(5) and related case law):
- Mortgage interest and property taxes (rental portion) are deducted first.
- Operating expenses (insurance, utilities, management) — but only to the extent rental income remains.
- Depreciation — only after operating expenses, and only to the extent rental income remains after step 2.
Expenses that do not fit within rental income are simply lost. There is no carryforward to future years under the § 280A residence rules. This contrasts sharply with non-residence rentals, where suspended passive losses carry forward indefinitely.
Tax Court method vs. IRS method for non-residence properties
If your vacation home does not qualify as a residence (personal use stays below the threshold), you are not required to use the IRS's allocation method described above. The Tax Court in Bolton v. Commissioner (694 F.2d 556, 9th Cir. 1982) approved an alternative: prorate shared expenses by rental days ÷ total days in the year (365), not rental days ÷ total use days.
Using 365 in the denominator instead of actual-use days generally allocates a smaller share of mortgage interest and property taxes to the rental activity — leaving more to deduct on Schedule A — while allocating a larger share of operating expenses and depreciation to the rental. For non-residence properties this can be favorable, but it only applies when the property is a true rental (personal use below the threshold). If the property is a residence, use the IRS method only.
Depreciation basis for a vacation home used personally
Depreciation on a vacation home (or any property with personal use) applies only to the rental-use percentage of the depreciable basis. The depreciable basis is the lower of adjusted cost basis or fair market value at the time the property was placed in rental service, allocated between land and improvements, then multiplied by the rental percentage.
Example: A beach house purchased for $500,000 (land $100,000, building $400,000) is placed in service with 85.7% rental use. The depreciable basis is $400,000 × 85.7% = $342,800. At the residential rental rate of 27.5 years (assuming it qualifies as residential rental property despite short-term use), annual depreciation is $342,800 ÷ 27.5 = $12,465. This amount is further limited by the expense-ordering rule if the property is a residence.
State income tax conformity
Most states that have a personal income tax follow the federal IRC § 280A framework for vacation home expense allocation, but conformity is not universal. States may have different thresholds, different personal use definitions, or different ordering rules. California, for example, generally conforms to IRC § 280A. New York also conforms for state purposes, but local New York City tax rules may differ. Always verify your state's treatment separately from the federal rules.
Frequently asked questions
How do I calculate the fair rental day percentage for expense allocation?
Divide your fair rental days by the total days of actual use (fair rental days plus personal use days). Do not include vacant days in the denominator. For example, 90 rental days ÷ (90 rental + 20 personal) = 81.8% rental use.
Can I deduct a rental loss on a vacation home I also use personally?
Only if personal use days stay below the greater of 14 days or 10% of fair rental days. If you exceed that threshold, the property is a "residence" under IRC § 280A and rental expenses are limited to rental income — no net loss is allowed.
Does the 14-day personal use limit apply to my spouse's use as well?
Yes. Personal use days include use by any co-owner, any family member (whether or not they pay rent), and anyone paying less than fair market rent. Your spouse's personal visits count the same as yours toward the 14-day threshold.
What happens to disallowed rental expenses if the vacation home is a residence?
Disallowed rental expenses — those exceeding rental income — are not carried forward. They are simply lost for that year. Unlike passive activity losses, excess vacation-home expenses under § 280A do not carry to future returns.
Do I still file Schedule E if rental income is under the 14-day rental exclusion?
No. If you rent for 14 days or fewer in the year, all rental income is excluded from gross income under IRC § 280A(g) (the "Augusta Rule"). You do not report the income, do not file Schedule E for the property, and do not deduct rental expenses — only mortgage interest and property taxes as itemized deductions.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.