You own a cabin in the mountains. You spend three weeks there every summer, lend it to your sister for a week, and rent it out on a short-term platform for the rest of the season. Come tax time, a single question decides how every dollar of rent and every dollar of expense is treated: did you use the place as a home? The answer does not depend on how you feel about the cabin. It depends on a day count — personal-use days against rental days — and landing on the wrong side of it can wipe out thousands of dollars of deductions you assumed you had. This guide walks through the three tax buckets a vacation home can fall into, how to count your days correctly, how to split expenses between personal and rental use, and the loss limits that apply to each bucket.
The Three Buckets: Where Your Vacation Home Lands
IRS Publication 527, the authoritative guide to residential rental property, sorts every dwelling unit you both use and rent into one of three treatments. A dwelling unit is any property with basic living facilities — sleeping space, cooking facilities, and a toilet — so houses, condos, mobile homes, boats, and even parts of a home you rent out all count.
Bucket 1: Rented fewer than 15 days. If you rent the property for fewer than 15 days during the year, you do not report any of the rent as income — not a dollar of it — regardless of how much you collected. The trade-off is that you cannot deduct any rental expenses either. This is the rule behind the so-called Augusta rule, named for homeowners near the Masters golf tournament who rent their houses for one lucrative week each spring. Note that your mortgage interest and property taxes are still deductible as personal itemized deductions on Schedule A, exactly as if you had never rented at all; they just cannot be claimed as rental expenses.
Bucket 2: Used as a home. If you rent for 15 days or more and your personal use exceeds the greater of 14 days or 10 percent of the days rented at a fair rental price, the property is a residence with rental activity — a mixed-use property. You report all rental income, but your rental deductions are capped at your gross rental income. You can zero out the rental profit, but you can never show a rental loss, no matter how large your real expenses are. Unused deductions carry forward to future years rather than disappearing.
Bucket 3: Not used as a home. If you rent for 15 days or more and your personal use stays at or below the greater of 14 days or 10 percent of fair-rental days, the property is treated as a straight rental property. You report the income and deduct all rental expenses, including depreciation, and if expenses exceed income you have a rental loss that may offset other income — subject to the passive-activity loss limits discussed below.
The boundary that matters most is the one between buckets 2 and 3, so the day count deserves your full attention.
Counting Days: The 14-Day and 10% Tests
The test, stated precisely: you used the dwelling unit as a home if your personal-use days exceed the greater of 14 days or 10 percent of the total days it was rented to others at a fair rental price.
The "greater of" phrasing trips people up, so work through what it means. If you rent the cabin for 100 days at fair market rent, 10 percent is 10 days, and the greater of 14 and 10 is 14 — so 15 or more personal days makes it your home. But if you rent for 200 days, 10 percent is 20, and the greater of 14 and 20 is 20 — so you can use it personally for up to 20 days and still keep pure-rental treatment. Heavy rental use buys you more personal days.
What counts as a personal-use day
A day counts as personal use if, for any part of the day, any portion of the unit is used for personal purposes by you or by certain other people. The details matter:
- Your own use — even at full rent. If you stay in the property yourself, it is a personal day, period. The IRS gives an example of owners who used their cottage for a weekend and paid themselves fair rental value for it; those days still counted as personal.
- Use by family members. Use by your spouse, siblings and half-siblings, ancestors (parents, grandparents), and lineal descendants (children, grandchildren) counts as your personal use — even if they pay you fair market rent. Letting your daughter live there all summer at full rent adds personal days to your count.
- Use by anyone paying less than fair rent. A friend who stays for a token amount, a charity auction winner who "won" a week at your cabin, or a relative paying below-market rent all generate personal-use days. Donating a week's stay to a charity fundraiser is generous, but it is a personal-use week, not a rental week.
- Days under a reciprocal arrangement. If you swap homes with another owner so each of you uses the other's property, those days count as personal.
There is one important exception for relatives: if a family member rents the place as their principal residence and pays fair market rent, those days are rental days, not personal days. That exception rarely applies to vacation homes, but it matters if a parent or adult child lives in your second property year-round.
Days that do not count as personal use
Repair and maintenance days are excluded. Any day you spend working substantially full time repairing and maintaining the property — not improving it — is not a personal-use day, even if family members use the property for recreation on the same day. Painting the deck, fixing the water heater, and servicing the HVAC count; adding a new bedroom does not, because that is an improvement. Keep a contemporaneous log of what you did each day — "June 3: replaced deck boards, 7 hours" — because the IRS interprets "substantially full time" as most of the working day, and a log is the only evidence you will have two years later at an audit.
Vacant days do not count either way. Days the property sits empty are neither personal nor rental days. They simply drop out of the fraction — which is exactly why the Bolton allocation method discussed below can be so valuable.
Splitting Expenses: The IRS Method vs. the Bolton Method
Once you know your bucket, you must divide each expense between personal and rental use. Only the rental portion goes on Schedule E. There are two accepted ways to compute the rental percentage, and they can produce very different numbers.
The IRS method, the only one shown in Publication 527, divides rental days by total days the property was used for any purpose — rental days plus personal days. If you rented the cabin for 120 days and used it personally for 30 days, the rental percentage is 120 divided by 150, or 80 percent. Every expense — mortgage interest, property tax, insurance, utilities, repairs, depreciation — takes that same 80 percent rental share.
The Bolton method (also called the court method) treats mortgage interest and property taxes differently from everything else. Because interest and taxes accrue evenly all year whether anyone is there or not, the Tax Court — affirmed by the Ninth Circuit, with a second court reaching the same result in a later case — allowed allocating them by rental days over the full 365-day year, while operating expenses and depreciation keep the IRS-method fraction. On the same numbers, interest and taxes take a rental share of 120 divided by 365, or about 33 percent, while repairs and depreciation still take 80 percent.
That sounds worse for the rental — and on Schedule E it is — but the personal portion of mortgage interest and property tax is not lost. It flows to Schedule A as an itemized deduction. The Bolton method effectively moves interest and tax deductions off the capped Schedule E return and onto your personal return, where they face no rental-income limit. Before the 2017 tax changes this was a clear win for anyone who itemized and a clear loss for anyone taking the standard deduction. Today the answer depends on your situation: the higher standard deduction means fewer owners itemize, and the cap on state and local tax deductions limits how much shifted property tax you can actually use. Run both methods each year rather than assuming last year's winner still wins.
One caution: the IRS has never conceded the Bolton method and continues to publish only its own. Tax software typically defaults to the IRS method, so if you want Bolton treatment you may need to override the allocation manually and keep a workpaper showing the math.
The Loss Limits: Why Your Bucket Decides Everything
Mixed-use property: deductions capped at rental income. If your home falls in bucket 2 and your rental expenses exceed your rental income, Worksheet 5-1 in Publication 527 allocates the limited deduction pool in a fixed order. First come the expenses that would be deductible anyway — mortgage interest, property taxes, and casualty losses. Next come operating expenses such as insurance, utilities, repairs, and maintenance. Depreciation goes last. Whatever does not fit inside gross rental income carries forward to the next year, where it gets another chance against that year's rental income. The carryforward never expires, but it can only ever offset rental income from the same property — it will never reduce your salary or business income.
The ordering has a practical consequence: because depreciation sits last in line, many mixed-use owners never get to deduct a dollar of it in a given year. If your rental income barely covers interest, taxes, and utilities, your depreciation — often the largest paper expense — simply joins the carryforward queue.
Pure rental property: losses allowed, then limited by the passive-activity rules. In bucket 3 there is no gross-income cap; expenses and depreciation can create a genuine rental loss. But rental activity is generally passive, so the loss can only offset other passive income unless you qualify for the active-participation exception: if you actively participate — approving tenants, arranging repairs, making management decisions — you may deduct up to $25,000 of rental losses against ordinary income. That allowance phases out between $100,000 and $150,000 of modified adjusted gross income and disappears entirely above $150,000. Suspended passive losses carry forward indefinitely and are freed up when you sell the property in a fully taxable transaction.
Minimal rental use: no loss, no income, no paperwork. In bucket 1 there is nothing to lose and nothing to deduct. Do not report the rent, do not claim rental expenses, and keep your day count in case the IRS asks how you qualified.
Common Mistakes That Cost Vacation-Home Owners
Miscounting family days. The single most common error is treating a relative's full-price stay as a rental. Your brother pays you the same weekly rate a stranger would, so you log it as rental income with no personal day — but the rules say otherwise. Family use counts as personal regardless of what they paid, unless the relative uses the home as a principal residence. One long family summer can quietly push you from bucket 3 into bucket 2 and erase a loss deduction you were counting on.
Forgetting the charity-auction week. Donating a week's stay to a school fundraiser feels like neither personal use nor a rental. The IRS treats it as personal use because the occupants paid less than fair rental price — they paid nothing to you at all. Log it as a personal week from the start.
Logging improvements as repair days. The maintenance-day exception covers only repairs that keep the property in working order. A week spent remodeling the kitchen is a personal-use week if you are living there while you work, even though you spent every day with a toolbox in your hands. Separate your repair trips from your renovation trips on the calendar.
Applying the 10% test to the wrong base. The 10 percent is measured against days rented at a fair rental price — not total days in the year, not days used. Below-market rental days do not enlarge the base; they shrink your rental day count and add to personal use at the same time, a double hit.
Assuming the loss is deductible because the property "lost money." A mixed-use property with $18,000 of rental income and $26,000 of expenses did not produce an $8,000 tax loss. It produced $18,000 of zeroed-out rental income and an $8,000 carryforward. If your return shows a Schedule E loss on a property you used for a month, something is wrong.
Keep a Day Log Before You Need One
Every rule in this guide runs on two numbers — personal-use days and fair-rental days — and the IRS asks for them after the fact, when memory has faded. A simple running log is the cheapest tax insurance a vacation-home owner can buy. For each day of the year the property is occupied, record the date, who was there, whether fair rent was charged, and, for work trips, what repair or maintenance you performed and roughly how many hours it took. Pair the log with a separate expense file: mortgage statements, tax bills, insurance, utilities, repair receipts, platform payout reports, and a short memo supporting your fair-rent figure, such as comparable listings for similar weeks.
The payoff goes beyond audit defense. Accurate day counts are what let you choose your allocation method deliberately, time a late-year personal trip without crossing into mixed-use territory, and prove a carryforward balance years after the expenses were paid. Track the days as they happen and the tax return nearly writes itself.
Keep Your Rental Books As Organized As Your Day Log
Vacation-home taxes reward owners who can prove exactly what happened on every day and every dollar — which days were rented at fair value, which were personal, which were repair days, and how each expense splits between the two. That kind of record-keeping is hard in a shoebox of receipts and easy in a ledger where every transaction is categorized the moment it happens. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.
