March 16, 2023

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

Learn the difference between fair rental days and personal use days, and how rental property owners can track each for tax purposes.

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

Are you a landlord or property owner looking to accurately report your rental income? 

Then understanding the difference between fair rental and personal use days is essential. 

Fair rental days are the total number of days that a property is available for rent, and it's a critical factor in determining the amount of income that needs reporting on your tax return. 

But how do you calculate and accurately report this on your tax return? 

In this article, we'll explore the topic in-depth, including how to report the correct information on Schedule E and how fair rental days differ from personal use days. 

We'll also discuss the importance of keeping track of each, and the potential consequences of failing to report correctly. 

By the end of this article, you'll have a solid understanding and be better equipped to report your rental income accurately.

Fair rental days vs. personal use days

Fair rental days are when a rental property is available to tenants or is rented.

In contrast, personal use days refer to the days that you, the property owner, use the property for personal purposes. This includes any days you, your family members, or your friends use the property for a vacation home, residence, or short-term rental.

It's essential to differentiate between them both because they have different tax implications. 

Fair rental days are used to calculate the amount of rental income that needs to be reported on your return, while rent collected on personal use days is not considered rental income and is not taxable.

It's worth noting that any days you spend doing maintenance and repairs at the property should not be categorized as personal use days.

Examples of fair rental days vs. 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 crucial for accurately reporting your income and total deductible rental expenses to the IRS. 

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). 

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 I 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 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

To ensure accurate reporting, rental property owners must keep meticulous records of their rental activities, including the number of days the property is available for rent, rented out, and used for personal reasons, as well as any related expenses incurred throughout the year such as repairs, maintenance, and management fees.

Rental property owners looking to simplify their tax prep can use Azibo. Our suite of accounting tools sort and tag all expenses by Schedule E category, track rental income by property, and generate detailed financial reports, including the Schedule E tax form landlords use to report rental expenses.

Using this platform, property owners can easily track all financial aspects of their rental business and monitor their fair rental and personal use days. 

Final recap: Fair rental days vs. personal use days

As a property owner, it is crucial to differentiate between fair rental days and personal use days, as failure to do so could result in penalties and fines.

Property owners should keep detailed records of rental activities to ensure compliance with tax laws, and create a system to track fair rental days, personal use days, and maintenance and repair days. 

This may seem overwhelming, but the right rental accounting software — as well as consulting with a tax professional — will help you stay compliant and organized.

Remember, consulting with a tax professional can also provide valuable guidance and ensure that you stay up to date with any changes in tax regulations.

This article and the Azibo Blog in general is intended for informational and educational purposes only. It is not investment, tax, financial planning, legal, or real estate advice. Please consult your own experts for advice in these areas. Azibo provides information believed to be accurate, but Azibo makes no representations or warranties about the accuracy or completeness of the information contained on this article or blog.