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I am considering purchasing a vacation property and renting it out for a majority of the season. Best case scenario I could generate about 50% of the annual cost (mortgage, tax, utilities, maintenance, insurance) with rental income.

What are the rules for determining how much I can deduct on my tax return?

This would be a 2nd mortgage. Of 52 weeks I anticipate 10 to 12 weeks of rental, and maybe 2 weeks of personal use.

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As long as your personal use is below 14 days (or 10% of the rental period), you can treat it as a rental property. That would be much more beneficial to you, as you can accumulate losses (and deduct some, or all, depending on your income, on your taxes). With 2 weeks personal use vs 12 weeks rental, you're on the edge.

If you're treating this as vacation home, i.e.: personal use more than 2 weeks (or >10% of the rented period, the greater), then you cannot deduct losses and can only deduct expenses to the extent of the income.

If you only rent it for 2 weeks or less, then its personal use and you don't have to declare the rental (really! Tax free income), nor can you deduct expenses.

For more details on this see the IRS Topic 415.

  • That last part about tax free income really surprises me. Mind blown! – MrChrister Dec 8 '12 at 4:59
  • Yes, Chris, but 2 weeks free income VS no expenses allowed. A tough tradeoff. – JTP - Apologise to Monica Apr 29 '15 at 19:09

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