Learn the IRS rules for owner-occupied rentals.
When you have a rental property that you also use as a home, different rules apply for declaring rental income and for deductions. For example, while you can deduct expenses to repair a rental home from your taxes, your deduction may be limited if the rental home is also considered a residence. Therefore, it is important to determine exactly what the IRS considers owner occupancy, and what your obligations are under the tax code for rental properties that you occupy part of the time.
Days of Use
The IRS looks at days of personal use to determine whether you must consider your rental property a residence. If you have 14 days of personal use or if you live at the home for 10 percent of the total days the home is rented , you must consider your rental property a residence as well as a rental property. Days of personal use include days in which you live at the home, days in which any member of your family or any partial owner spends at the home (other than for repairs), days in which someone lives at the home while you live at their home (i.e. a house exchange), days in which you permit someone to live in the home below the fair rental price, or days in which you donate use of the home to a charitable organization.
Rental Income
If your rental property is both a home and a rental, then you must declare all of your rental income as ordinary income provided the home was rented for 15 or more days. This income should be reported on Schedule E (Form 1040). This is distinct from properties that are used only as rental properties, in which case the income is declared on Schedule E, Part I.
Rental Deductions
If you have a net profit for the year that exceeds your expenses, you can deduct all of your expenses from the rental income you made. However, if your expenses exceed your profit - i.e. if you suffered a net loss- your deductions are limited for expenses based on the fact that you live in the home and that it is both a residence and a rental. To determine how much you can deduct, add up the total number of days you lived in the home and the total number of days you rented the home. Then divide the number of days you used the home as a rental by the total number of days the home was used. So, for example, if you lived in the home for 10 days and you rented it for 40, then the total number of days the home was used was 50. Divide 40 (the days rented) by 50 (the total number) to get the percentage of expenses you can deduct. So, since 40/50 is equal to 80 percent, you can deduct 80 percent of your expenses.
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