We have a house classified as "vacation/short-term rental" on Schedule E. There's a "14-day rule" that's critical in deciding if a house is a personal residence or a business, described in sites such as this:
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My question, if one owns the house for less than a full tax year, or changes its status during the year, are the 14 days pro-rated, that is, is the number 14 reduced according the percentage of the year that the house was owned or considered a business ?
For example, we purchased the house at the end of April 2022, so owned it roughly 2/3 of the year. Does that mean we were only allowed to use it for personal use 9 or 10 days (during the portion of 2022 we owned it) ? Does it mean we only needed to rent it for 10 days to satisfy the threshold to consider it a business ?
Similarly, if we convert it to being a 2nd residence during 2024, roughly 1/3 of the way into the year, can we only use it for personal use 4 or 5 days during that first 1/3 of the year that we considered it a business, and need we rent it only 5 days ?
The code only says the house has to be used during the year as your principal residence. It doesn't give any time requirements, and does not require pro-rating.
I think you have the 14 day rule backwards. If you claim that the property is a personal residence (primary or secondary), you can rent it for up to 14 days and not have to report the income. If you rent for more than 14 days (total, not per rental), you must report the rental income on Schedule C or E, whichever is appropriate.
The "days of personal use" is a factor in determining what percentage of the expenses of maintaining the home is allowable as rental expense and how much is personal in nature.
Addressing the specifics of your last two paragraphs - (For example,...) There is no limit on the number of personal days (that is, not "9 or 10 days") you could use the property. It also doesn't mean that you had to rent it for 10 days to consider it a business. It means that if you only rented it for 10 days, you could choose not to treat it as a business and not have to report the rent you received.
(Similarly...) If you convert it into a second residence in mid-2024, the number of days of personal use while still operating as a business, would determine what percentage of the expenses of maintaining the residence were business expenses during that same period. There is no minimum or maximum number of days. Expenses incurred after converting to personal use, would not be deductible (other than mortgage interest and real estate taxes, subject to the usual rules). Again, if you choose to rent it after converting to personal use, you can rent it for up to 14 days without having to report the income. More than 14 days and it becomes rental property again.
Yes, but. my understanding is that if I rented it for less than 14 days, I cannot write off any business expenses. But I rented it for 10 days while owning it 2/3 of the year, which works out to a rate of 15 days for a full year. Does that mean I CAN write off business expenses ?
The (up to) 14 days of free rent is inconsistent with the property being used for business purposes. You get one or the other, not both. If you choose the tax-free rent option, you get no business deductions for that time.
So even if I rent it for less than 14 days, I can choose to pay tax on the rent and then deduct business expenses (proportional to business versus personal use) ?
Section 280A doesn't make it optional. If you have used the property as your primary residence and then rent it out for fewer than 15 days during the year, the income you receive for that rental is tax exempt, and there are no deductions allowed for that rental period.
No, in 2022, we owned it for 2/3 of the year. Rented it 10 days, used for personal use 11 days. I took the expenses, pro-rated by the fraction of a year and the 10/(10+11) usage ratio.
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