Advantages to renting a residence as opposed to a rental property?

[xanman2112]

I was reading that if you occupy a rental property for more than 10% of the days it is rented in a given year, then the property is considered a "residence".  For example, if I rent out a property for 200 days in a year, and I stay there for more than 20 days in that same year... then the property is considered my "residence".

What are the tax advantages of renting a "residence" as opposed to a "rental property"?

[CatinaT1]

These rules apply to short term rentals. The facts and circumstances of each situation determine if you have a rental property or a short-term rental business. This also determines how the income is taxed and what expenses are deductible.

A dwelling unit is a residence if the taxpayer uses it for personal purposes for more than the greater of 14 days, or 10% of the total days it is rented to others at a fair rental price [I.R.C. § 280A(d)].

If the taxpayer uses a dwelling unit for personal purposes, but not as a residence, he or she must report all the rental income and divide expenses between the rental use and the personal use.

For a residence, the expenses allocated to rental use may offset, but not exceed, the gross income from the property. Gross income is calculated by reducing gross receipts by expenditures to obtain tenants for the unit, such as advertising and management fees. 

Renting Residential and Vacation Property

Tax Tips When Renting Out Your Home

[Carl]

What you cite applies to short term rentals. What defines a short term rental depends on where you look it up. For example, in my county they consider a short term rental to be any property occupied for less than 30 days for any one period during the tax year. But at the state level it's defined as any property rented out for less than 6 contiguous months. The IRS definition is not so clear cut.  So what applies to you depends on the specifics of your given situation.

The situation you describe would not be considered a short term rental by the IRS.

To see a fairly descent example of what you're attempting to describe, check out IRS PUB 527 at https://www.irs.gov/pub/irs-pdf/p527.pdf  On page 17 under "Dwelling Unit (Including Vacation Home)" check out the first example  referencing the "beach cottage" and pay close attention to the dates in that example. It's odd to me that dates outside of the rental classification period count against you. But it is what it is.

If you are planning to rent your property for more than half the year, and occupy it as your primary residence, 2nd home or vacation home for less than half the year, you'd probably be better off leaving it classified as a rental year-round and just reporting your personal use days. What that will do is just pro-rate your deductible expenses of mortgage interest, property taxes and property insurance to account for the time of personal use. However, the program does have it's limitations and in the long run chances are the depreciation will be so far off in a few years that it will matter big time.

[Anonymous_]

---

@Carl wrote:

If you are planning to rent your property for more than half the year, and occupy it as your primary residence, 2nd home or vacation home for less than half the year, you'd probably be better off leaving it classified as a rental year-round and just reporting your personal use days. 

---

The personal use days are the actual issue, not the classification so the above-quoted suggestion would be ineffective under the facts presented in this thread. As long as there are personal use days, expenses will be prorated accordingly, and days not rented at fair value will not count towards rental use.

Perhaps what some owners (or even the vast majority of owners) do not realize is that, per Section 280A, a day is not counted as a day of personal use if the owner is engaged in repair and maintenance on a substantially full-time basis on that particular day. That would include time spent traveling to stores to get supplies and other necessary items, cleaning, straightening, etc. In fact, even if the owner's entire family were using the property for personal purposes while the owner was engaged in repair and maintenance during that day, it would still not count as a day of personal use.

---

@Carl wrote:

What you cite applies to short term rentals. 

---

Actually, it does not simply apply to short-term rentals. Rather, the term "residence", for the purposes of Section 280A, is used to refer to a dwelling unit that is used for personal purposes for a number of days which exceeds the greater of 14 days or 10% of the number of days during the year for which the unit is rented at a fair rental.

As an example, if an owner rents property to one renter for a 300-day period (not exactly "short-term") but also uses the property for personal purposes for 35 days during the same year, the owner has used the property as a "residence", must allocate expenses between rental and personal use, and the remaining 30 vacant days are not considered to be fair rental days (even though the unit may have been "available for rent"). Further, losses will be limited per Section 280A.