Determining the number of days of personal use and rental use is important because this is the basis on which you will determine whether the dwelling unit is considered to be used as a home, which will in turn determine whether you can deduct your rental expenses up to the amount of your rental income, or deduct all your rental expenses, subject to the passive activity limits.
Dividing Expenses
If you used a dwelling unit for both personal and rental purposes, you divide your expenses based on the number of days used for each purpose. This is not necessarily the same way you consider days of personal use for determining whether the dwelling unit was used as a home. For dividing expenses, you use the following rules:
Any day that the unit is rented at a fair rental price is a day of rental use, even if you used it for personal purposes that day.
Any day that the unit is available for rent but not actually rented is not considered a day of rental use.
Depreciation
You can claim a deduction for depreciation on the rental part of your property, if you own the property, you use it as rental property, the property has a determinable useful life (more than one year), and it is not specifically excluded as depreciable property for tax purposes (property placed in service and disposed of in the same year).
There are three methods for calculating depreciation. The method you use for rental property depends on when it was placed in service.
MACRS (Modified Accelerated Cost Recovery System) for property placed in service after 1986
ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987
Straight-line, declining balance, or other method for property placed in service before 1981.
The MACRS system, in turn, consists of two separate systems – the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Rental property is generally depreciated under GDS. Under this system, each item of property is assigned to a property class. Residential real property is in a class of its own.
You may need to use Form 4562 to figure your depreciation deduction.
Figuring Rental Income and Deductions
If you determine that the dwelling unit was not used as a home, based on the criteria indicated above, you report all the rental income and deduct all the rental expenses. You could have a loss, subject to certain limits.
If you determine that the dwelling unit was used as a home, you figure your rental income and expenses based on how many days the unit was rented at a fair rental price.
If it was rented out for fewer than 15 days, you do not have to report any rental income and you cannot deduct any rental expenses.
If it was rented out for 15 days or more, you report all your rental income. If you have a net profit from the rental activity, you can deduct all your rental expenses. But if you have a net loss, your deduction for rental expenses may be limited. There is a worksheet in the instructions for figuring the limit on rental deductions for a dwelling unit used as a home.
Limit on Deductions
In the second case above, where your expenses exceed your income, you cannot use the excess expenses to offset other income reported on your tax return. But you may be able to carry the excess expenses over and use them to offset rental income from the same property in the following year.