Depreciation for Short Term Vacation Rental: business use percentage fluctuates

[msvhughes]

After realizing our CPA made multiple mistakes through the years, I am using TurboTax to prepare our individual returns.  We have a short-term vacation rental property with furniture listed as a depreciable asset.

Regarding business use percentage for this asset, the percentage changes annually, depending on days rented vs our personal use.  Is is allowable to change the business percentage use in TurboTax each year?

For example, in 2022, we recorded 217 fair rental days and 10 personal use days.  Would the business use percentage be based on 217/227 or 355/365 (the property is available to rent all year). 

In 2023, we recorded 245 fair rental days and 9 personal use days.  Slight change in percentages for the year.

Any insight into this topic is much appreciated!

[AmyC]

Regarding asset depreciation, you can change the business percentage each year since use does vary. This year, you will enter the asset in the depreciation section and the program will ask the percentage for 2023. The next screen will ask you to verify or enter the correct amount of prior depreciation. 

For 2022, I am going to assume the property was held out for rent on all days except when you were vacationing. Work days are not personal days. This would mean 355/365 days were available for rent.

The IRS has Pub 527 which is full of helpful information, if you want to dig in.

There are more comments below which are correct about how to handle the rental property overall and including the number of days for allocation of expenses.  [Edited 1/16/24 8:08 am] @msvhughes

[Carl]

Just FYI for clarification:

 - Vacant periods between renters do not count as personal use days.

 - If you live in the property for the primary purpose of preparing it for the next tenant, those days are not personal use days. This includes living there to update/upgrade the property, as well as to perform or supervise renovations.

[Anonymous_]

I believe it would be a simple matter to enter the personal use days in the screen depicted in the screenshot below (in the Property Profile section).

[Carl]

That's actually the way I go, instead of trying to figure percentages.

[Anonymous_]

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@Carl wrote:

That's actually the way I go, instead of trying to figure percentages.

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If you enter percentages in the program, as suggested by @AmyC, that only has an impact on the asset and not the expenses (as using the property for personal purposes should). 

For personal use of a rental property during the tax year, the personal use and rental use days should be entered into the program so that the rental expenses are split appropriately. Even then, the program does not split all expenses as it should.

Finally, note that, with respect to short-term rentals with no personal use, the IRS never has provided guidance regarding how to handle "idle days" (no personal use and no renters). My opinion would be those days count as rental use if the property was actually available for rent all year.

I'm going to page @AmeliesUncle for input on this last point.

[Carl]

Interpretation of the IRS rules on this can differ; and it depends on which specific document one reads too. As I see it, every day it was "available for rent" is a rental/business use day. I also note that in the TTX program, vacant periods between renters does not count against you. So if the property was available for rent for 365 days and you only rented say, 250 days with no personal use, then all expenses are allowed, including depreciation for the full year.

[Anonymous_]

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@Carl wrote:

.....every day it was "available for rent" is a rental/business use day....

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Yeah, I agree. I simply stated that there is no official guidance with respect to short-term rental properties that have zero personal use days and days where there are no renters during the tax year.

[AmeliesUncle]

I don't think it matters if it is short term, long term or any other kind of asset.  Business or rental property with zero personal use would be 100% business/rental.  The result would be the same regardless if you count the unused days or not.

Or am I misunderstanding what you are referring to?

[Anonymous_]

This: https://www.thetaxadviser.com/issues/2012/may/hagy-banner-may2012.html

If the rental property is not rented and there is no personal use, very little guidance is provided as to the deductibility of expenses. One can argue that all of the expenses are deductible since there is no personal use, especially if extensive efforts to rent the property were made. Alternatively, since there are no rental or personal use days, the allowance of deductions ratio computed as “0 days rented divided by 0 days used” equals an undefined number. In this argument, it appears that only otherwise deductible mortgage interest and property taxes could be passed through to the partners. 

Of course, they're talking about zero rental days here but, presumably, the property is still available for rent. I believe this would be applicable, if at all, to short-term rental properties (i.e., 7 days or less, sporadically throughout the year).

[AmeliesUncle]

I missed the part about zero rental days.

If there are ANY rental days (and no personal days), it is 100% rental.  But if there are zero of each, then the IRS and courts look at "intent".  Intent can sometimes be difficult to prove, but as was pointed out, extensive advertising is pretty good proof.

[Anonymous_]

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@AmeliesUncle wrote:

If there are ANY rental days (and no personal days), it is 100% rental.  But if there are zero of each, then the IRS and courts look at "intent".  Intent can sometimes be difficult to prove.....

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That makes sense, absolutely and positively, with respect to ANY rental days and no personal days equals 100% rental.

However, the issue may arise as to whether those "idle days" (between rentals) are had been used for personal purposes. For example, if a taxpayer has a "vacation rental" (short-term) and claims 150 days of rental use per year and zero personal use days, it may be difficult for the taxpayer to show that they actually had zero personal use days (tough to prove a negative). 

I have this exact same scenario, personally. We have a house, strictly a short-term rental with no personal use whatsoever. Regardless, the house is around 30-45 minutes from our primary residence and it would be tough to prove we weren't using it for personal purposes on any day when there were no renters on the premises.

[Carl]

That's rule #2 when dealing with the IRS on an audit.

1. You are guilty until proven innocent.

2. The burden of proof is on the accused, not the accuser.

3. If it's not in writing, then it did not occur.

[Anonymous_]

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@Carl wrote:

That's rule #2 when dealing with the IRS on an audit.

1. You are guilty until proven innocent.

2. The burden of proof is on the accused, not the accuser.

3. If it's not in writing, then it did not occur.

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See https://www.taxnotes.com/special-reports/practice-and-procedure/has-shift-burden-proof-really-helped...