If the residence is rented for 15 days or more and is used for personal purposes for more than 14 days or 10 percent of the days rented, whichever is greater, allocable rental expenses are allowed only to the extent of rental income. Allocable rental expenses are deducted in three separate steps:
- The interest and taxes are deducted
- Utilities and maintenance expenses are deducted
- Depreciation expense is deducted
For utilities, maintenance, and depreciation expenses to be deductible, there must be positive income following the deduction of items in the preceding steps. In addition, the expenses, other than interest and taxes, are only deductible to the extent of that positive income.
Expenses are allocated between the rental and personal days before the limits are applied. The IRS requires that the allocation be on the basis of the total days of rental use or personal use divided by the total days of use.
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