If you have a second home that you rent periodically, you should try to keep your personal use to less than 14 days per year or less than 10 percent of the days the home is used. Once you get over the 14-day or 10 percent thresholds, your vacation home is classified as a residence and deductions are limited.
If you stay under the 14-day or 10 percent limits on personal use, your second home will qualify as rental property. This may permit you to deduct repairs, maintenance, insurance, and depreciation costs. If your expenses exceed your income, you can deduct the loss, subject to the passive loss rules.
Under those rules, losses up to $25,000 may be deducted if your adjusted gross income (AGI) is under $100,000. As your AGI increases your ability to deduct passive losses decreases, phasing out at $150,000 in AGI.
If you’re over the 10 percent limit and your second home is classed as a residence, you only can deduct expenses up to the amount of rental income. What’s more, before you can deduct any operating expenses or depreciation, you have to use your mortgage interest and property tax deductions first, in effect wasting deductions.
