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Understanding the Tax Implications of Rental Vacation Property by Angie Adames, CPA

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Posted on January 15, 2026 by Angie Adames

Countless benefits can come from owning vacation property that taxpayers use as a personal retreat for part of the year and lease to others in return for rental income during other times. However, renting residential property, whether a house, apartment, room or boat, has numerous tax implications that property owners must plan for to maximize profits and minimize tax liabilities.

Rental income from residential property is generally taxable unless it is rented out for 14 days or less during a calendar year. Once the rental period reaches the 15-day mark, the property owner must report and pay taxes on all property rental payments they receive during the year. However, under U.S. tax laws, property owners may qualify to offset their rental income and reduce their tax liabilities by deducting the expenses they incur for renting the property, including advertising, cleaning and maintenance, mortgage interest, property insurance and taxes. Eligibility to claim these deductions depends on the amount of time the property owner spends renting the property for business use, compared to the time they spend enjoying it for personal use.

Personal-Use Residence vs. Rental-Use Business Property

The IRS classifies a vacation home as either 1) a personal residence used by property owners and their family members, or 2) a rental business property that generates rental income and can claim tax deductions for eligible business expenses. More specifically, it qualifies as rental income property when the property owner:

When calculating the number of days a home is used for personal vs. rental use, one must disregard any days the property was vacant or was undergoing maintenance and repairs. In addition, careful attention should be paid to the days the property is rented for less than the fair market rate, perhaps to a family member or friend. The IRS considers such an arrangement personal use property.

Tax Treatment of Multi-Use Vacation Property

When a vacation home qualifies as rental property, property taxes, repair and improvement costs, and other potentially deductible business expenses must be allocated between the actual days the property is rented out and the days it is used for personal enjoyment. As a general rule, taxpayers may only deduct amounts that are proportional to the actual number of days the home is rented to non-family members.

While property owners may not deduct rental expenses that exceed the gross rental income limitation (less the rental portion of mortgage interest, real estate taxes, and casualty losses, and rental expenses like realtors’ fees and advertising costs), they may be able to carry forward some of these unused rental expenses to the following year.

With the increased standard deduction under the One Big Beautiful Bill Act (OBBBA), fewer taxpayers will take the time and effort to itemize the deductions they relied on in previous years to reduce their taxable income. In addition, the law imposes significant restrictions on deductions for mortgage interest and property taxes, thereby limiting the potential tax savings rental property owners can yield. For example, the mortgage interest apportioned to the personal use of a rental property may not be considered as an itemized deduction if the taxpayers did not use the property for more than 14 days.

On the plus side, the law restores 100 percent bonus depreciation through 2027, enabling short-term rental investors to fully deduct furnishings, improvements, and repair costs in the first year.

Other Rules, Limitations and Exceptions to the Rules

Vacation homes classified as rental property may generate deductible losses for taxpayers whose rental expenses exceed their rental income. However, under the passive activity loss (PAL) rules, taxpayers may only deduct losses from passive activities, such as real estate rental, from income generated by similarly passive activities. For example, taxpayers cannot deduct passive rental activities losses from wage income they earn from a full-time job. Any losses that do not qualify for a deduction under the PAL rules in the current year may be carried over into future years to be deducted when property owners have additional passive income or when they sell the rental property that created the passive losses.

There is an exception to the PAL rules that allows “certain” taxpayers who actively participate in rental activities and have adjusted gross income (AGI) of less than $100,000 to deduct up to $25,000 of annual passive rental real estate losses from current year income. Depending on the number of hours spent materially participating in the delivery of real estate services, property owners may qualify as real estate professionals for whom the rule treating rental activities as automatically passive may no longer apply.

On a final note, when a property is located near the site of a significant, multi-day event that attracts out-of-state visitors, such as Art Basel, the Miami International Boat Show or the Super Bowl, its owners may be able to generate tax-free rental income provided they rent out the property for 14 days or less during the year. This is especially beneficial in today’s economy, where homeowners can quickly and easily market their properties, often at unusually high short-term rates via services such as Airbnb and VRBO. In these circumstances, however, the property owner will not qualify as a business operator and will not be able to deduct any portion of expenses for repairs, maintenance, cleaning or rental agency fees.

Before handing over the keys to your vacation home, seek the guidance of professional accountants and advisors to help you navigate the complexity of the tax laws and maximize your earnings without increasing your tax liabilities.

About the Author: Angie Adames, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she provides tax and consulting services to real estate companies, manufacturers and closely held entities. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.