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

Managing rental real estate involves much more than collecting rent; it encompasses an understanding of terms like fair rental days and personal use days, which directly impact your financial and tax obligations related to properties intended for generating rental income.

Grasping the difference between fair rental and personal use days is essential. Fair rental days represent the periods your property is generating income by being leased to tenants, important for your tax reporting on Schedule E. Personal use days, however, reflect the time you or your family enjoy the property for personal activities, affecting how you can claim deductions.

Imagine seamlessly navigating the complexities of rental property management, from tax implications to maximizing your deductible expenses. Knowing these distinctions not only ensures compliance with IRS regulations but also optimizes your property’s profitability and tax benefits.

Ready to master your rental strategy? Let’s discuss the definitions, distinctions, and impacts of fair rental and personal use days to optimize your property’s financial performance and tax reporting.

What are fair rental days?

Fair rental days are the days in a year when your rental property is rented out to tenants. This concept is important for tax reporting, especially when filling out Schedule E on your tax return. Determining the fair rental price is crucial for accurately reporting rental income and deductible expenses, as it ensures the property is rented out at a price that reflects its fair market value, which is essential for tax purposes.

The count of fair rental days helps determine the extent of your deductible expenses and how your rental income is taxed.

What are personal use days?

Personal use days are when you or your family use the rental property, such as a vacation property, for non-rental purposes. This includes any time the property is used as a vacation home or a residence for you, your relatives, or friends, regardless of whether rent is charged.

Personal use days do not count towards your rental activity for tax purposes. They can limit the amount of expenses you can deduct on Schedule E, especially when determining the allocation of expenses to personal use days in vacation property scenarios.

Fair rental days vs. personal use days

Fair rental days are designated for when your rental property is occupied by tenants. This period is crucial for generating rental income and is integral to your property’s financial performance.

In contrast, personal use days are those when the property is used by you, the owner, or by your family, friends, or acquaintances for non-commercial purposes. This can include stays for vacations, as a temporary residence, or for leisure. These days are distinct from fair rental days as they do not contribute to the property’s rental income.

Understanding this distinction 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 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 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 crucial 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, rental property owners must keep meticulous records of their rental activities, including the number of days the property is 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.

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.