Fair Rental Days vs. Personal Use Days for Real Estate Taxes

Managing rental real estate goes beyond simply collecting rent. It requires understanding key concepts like fair rental days and personal use days, which significantly impact your financial and tax obligations for income-generating properties.

Fair rental days are periods when your property is leased to tenants, generating income. These are crucial for accurate tax reporting on Schedule E. Personal use days, on the other hand, are when you or your family use the property for non-rental purposes, affecting your ability to claim certain deductions. Personal use days include time spent at a vacation property.

Grasping these distinctions is vital for effective property management. It ensures compliance with IRS regulations and helps optimize your property’s profitability and tax benefits. By mastering these concepts, you can navigate the complexities of rental property ownership more confidently, from managing tax implications to maximizing deductible expenses.

Let’s explore the definitions, differences, and impacts of fair rental and personal use days to enhance your property’s financial performance and streamline your tax reporting.

What are fair rental days?

Fair rental days are the days during the year when your property is rented to tenants at a fair rental price. These days are essential for tax reporting, especially when completing Schedule E on your tax return.

The number of fair rental days helps determine:

• How much of your rental expenses can be deducted, including mortgage interest, property taxes, insurance, maintenance, and depreciation.
• How your rental income is taxed, which includes ensuring the rental income and expenses are reported accurately based on the actual rental period.

Accurately calculating fair rental days ensures that only the rental portion of the property’s expenses is claimed for deductions, helping you comply with IRS rules on reporting rental income and expenses.

What are personal use days?

Personal use days are any days when you or your family use the rental property for non-rental purposes, such as a vacation or personal residence. These days include:

• When you, a family member, or someone with an ownership interest in the property uses it for personal purposes, unless they pay a fair rental price and use it as their main home.
• When the property is used in exchange for another dwelling or rented at less than a fair rental price.

Personal use days do not count towards rental activity for tax purposes. They reduce the amount of rental expenses you can deduct on Schedule E, as expenses must be divided between personal and rental use days.

Accurately calculating personal use days ensures compliance with IRS rules, especially for mixed-use or vacation properties, allowing you to claim deductions only for the rental portion.

Fair rental days vs. personal use days for accurate tax reporting

Understanding the distinction between both fair rental and personal days is essential due to the different tax implications each category carries. Fair rental days directly impact the rental income you must report on your tax returns.

On the other hand, income derived during personal use days does not qualify as taxable rental income, and such days do not contribute to your property’s rental activity for tax calculations.

The classification of days as either fair rental or personal use also affects the deductibility of expenses related to the rental property, including how expenses are allocated and the limitations on deductions based on the property's classification.

Additionally, it’s important to note that time spent on property maintenance and repairs shouldn’t be confused with personal use. Such activities are part of your rental business operations and do not count as personal use days.

Differentiating these days is vital for accurate tax reporting and maximizing your property’s financial efficiency.

Examples of fair rental days and personal use days

Let's say you own a lakehouse as a second home, and it was occupied 200 days out of the year. For 150 of those days, you rented it out to tenants, while the remaining 50 days were for personal use. But on five of those 50 days, you were working on repairs for a significant part of your stay. 

In this example, the fair rental days would be 150 days, the number of days tenants have occupied the property. 

The personal use days would be 45, the number of days you used the property for personal reasons, minus the 5 days you spent on maintenance. 

Understanding the difference between personal and rental use is important for accurately reporting your income and total deductible rental expenses to the IRS. 

How many days can you use a rental property for personal use

Rental for 14 days or less

If you rent out your vacation home for 14 days or fewer within the year, you can enjoy the income without needing to report it on your tax returns. This rule allows you to still deduct mortgage interest and property taxes on Schedule A as you would with a standard second home.

However, you cannot claim any rental expenses since the property isn’t categorized as a rental property for tax purposes.

Rental for more than 15 days with limited personal use

When your property is rented out for more than 15 days and personal use does not exceed 14 days, it qualifies as a rental property. This classification requires you to report all rental income while also allowing you to deduct typical rental expenses, such as utilities, maintenance, and depreciation, against this income.

Excessive personal use

If personal use days exceed the greater of 14 days or 10% of the total days rented, the IRS considers the property a personal residence. In this scenario, while you must still report all rental income, your deductible rental expenses cannot exceed the amount of rental income received, potentially limiting the tax benefits typically associated with rental properties.

What is a Schedule E form, and why is it relevant? 

Schedule E is a tax form landlords use to report rental income and expenses to the Internal Revenue Service (IRS). Understanding and claiming tax deductions is vital for rental property owners when filling out Schedule E, as it allows them to maximize deductible expenses such as depreciation of rental property and understand the impact of personal use on tax benefits.

On Schedule E, you’ll need to report the rental income you received, mortgage interest paid, and any related deductible expenses — as well as the total days your property was available for rent or used for personal purposes.

How to report fair rental days and personal use days on Schedule E

You must complete Part 1 of the form to report both fair rental and personal use days on Schedule E. 

In this section, you'll need to provide the rental income you received, the expenses you incurred, and the number of days your property was available for rent.

By understanding how to keep track of fair rental and personal days to report them on Schedule E, you will be better equipped to comply with tax laws and avoid potential penalties altogether.

The importance of accurate rental expenses and property accounting

Inaccurate reporting can have significant implications for rental property owners. 

If underreported, property owners may pay fewer taxes than they should, which could result in an audit or penalties from the IRS. The IRS may also require property owners to pay back taxes and interest on underreported rental income. In addition, if the IRS determines that a property owner has willfully underreported rental income, they may face criminal charges.

On the other hand, overreporting may result in higher tax liabilities than necessary, which could negatively impact a property owner's cash flow.

Tips for tracking fair rental and personal use days for your rental property

To ensure accurate reporting on your Schedule E, rental property owners must keep meticulous records of their rental activities.

Rental property owners looking to simplify their tax prep can use Azibo's suite of accounting tools. These tools offer several benefits:

• Sort and tag all expenses by Schedule E category
• Track rental income by property
• Generate detailed financial reports, including the Schedule E tax form

Using Azibo, property owners can:

• Import all rental business transactions automatically by linking relevant bank or credit card accounts
• Manually record transactions if needed
• Use the bookkeeping tool to assign each transaction to a property and category from the Chart of Accounts
• Work with a CPA to calculate depreciation and amortization values, then add these to Azibo
• Generate an up-to-date Schedule E form for all properties in the selected calendar year

While Azibo streamlines much of the process, property owners will still need to manually input or provide their tax preparer with the Fair Rental Days and Personal Use Days.

By utilizing this platform, property owners can easily track all financial aspects of their rental business, monitor their expenses and income, and generate the necessary reports for tax purposes, including the Schedule E form.

Sign up for Azibo for free, today.

Accurately reporting your fair rental days on schedule E

As a rental property owner, the distinction between fair rental days and personal use days is more than just calendar entries; it's the foundation of your financial and tax strategy. Missteps in tracking and reporting these days can lead to significant tax implications, affecting your investment's profitability.

But here's the good news: You don't have to navigate this alone. Azibo offers a comprehensive suite of tools designed to simplify your rental property management. From accurate tracking of rental and personal use days to efficient financial reporting, Azibo is your partner in maximizing your property's potential while ensuring compliance with tax regulations.

Take control of your rental property's financial future today. Visit Azibo to learn how our tailored solutions can transform your property management experience, ensuring peace of mind and financial success. Get started now and make your next tax season a breeze with Azibo by your side.

Fair rental days FAQs

How many days can you use an investment property?

For a rental property, the number of days you can use it for personal purposes while maintaining its status for tax benefits is limited. According to IRS rules, personal use should not exceed 14 days or 10% of the number of days the property is rented at a fair rental price, whichever is greater.

Exceeding this limit impacts the rental property's tax deductions, as it alters the balance between rental and personal use. This distinction is crucial for determining deductible rental expenses on your tax return, especially when filing Schedule E. It's essential for rental property owners to be aware of these limits to ensure compliance with tax laws and to maximize deductible expenses.

What does fair rental value mean?

Fair rental value is a key term in rental real estate, representing the reasonable rent amount you can expect from a property, based on current market conditions and comparable properties. This value is used to determine gross rental income and is crucial when setting rental prices.

For tax purposes, fair rental value affects the calculation of net rental income and deductible business expenses. It's essential for accurately reporting rental income and expenses on your tax return and for ensuring the rental property operates efficiently as a source of supplemental income.

How does the IRS know if I have rental income?

The Internal Revenue Service (IRS) identifies rental income through the tax returns filed by rental property owners. When you report income and expenses from rental activities on IRS Form Schedule E, it includes details of gross rental income received, mortgage interest paid, real estate taxes, and other deductible expenses incurred.

The IRS may also use information from third parties, like property management companies, to verify the accuracy of reported income. Rental property owners must report all rental income received, including any security deposits that are not returned, and accurately detail all expenses related to their rental real estate business to comply with tax laws and avoid issues with the IRS.