9.8 Counting Personal-Use Days and Rental Days for a Residence

In applying the 14-day/10% personal-use test (9.7), personal-use days are:

  • Days you used the residence for personal purposes other than days primarily spent making repairs or getting the property ready for tenants. If you use a residence for personal purposes on a day you rent it at fair market value, count that day as a personal day, not a rental day, in applying the 14-day/10% test.
  • Days on which the residence is used by your spouse, children, grandchildren or great-grandchildren, parents, brothers, sisters, grandparents, or great-grandparents. However, if such a relative pays you a fair rental value to use the home as a principal residence, the relative’s use is not considered personal use by you. If you rent a vacation home to such relatives, their use is considered personal use by you even if they pay a fair rental value amount; see Example 1 below. The same rules apply if the use of the residence is by a family member of a co-owner of the property.
  • Days on which the residence is used by any person under a reciprocal arrangement that allows you to use some other dwelling during the year.
  • Days on which you rent the residence to any person for less than fair market value.
  • Days that a co-owner of the property uses the residence, unless the co-owner’s use is under a shared-equity financing agreement discussed later in this section.

An owner is not considered to have personally used a home that is used by an employee if the value of such use is tax-free lodging required as a condition of employment (3.13).

Shared-equity financing agreements for co-owners.

Use by a co-owner is not considered personal use by you if you have a shared-equity financing agreement under which: (1) the co-owner pays you a fair rent for using the home as his or her principal residence; and (2) you and your co-owner each have undivided interests for more than 50 years in the entire home and in any appurtenant land acquired with the residence.

Any use by a co-owner that does not meet these two tests is considered personal use by you if, for any part of the day, the home is used by a co-owner or a holder of any interest in the home (other than a security interest or an interest under a lease for fair rental) for personal purposes. For this purpose, any other ownership interest existing at the time you have an interest in the home is counted, even if there are no immediate rights to possession and enjoyment of the home under such other interest. For example, you have a life estate in the home and your friend owns the remainder interest. Use by either of you is personal use.

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image Planning Reminder
Shared-Equity Financing Agreements
As an investor, you can help finance the purchase of a principal residence for a family member or other individual. The rental income you receive for your ownership share in the property may be offset by deductions for your share of the mortgage interest, taxes, and operating expenses you pay under the terms of the agreement, as well as depreciation deductions for your percentage share. Rental losses are subject to the passive loss restrictions in Chapter 10.
The other co-owner living in the house may claim itemized deductions for payment of his or her share of the mortgage interest and taxes.
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Rental of principal residence prior to sale.

You are not considered to have made any personal use of a principal residence that you rent or try to rent at a fair rental for (1) a consecutive period of 12 months or more or (2) a period of less than 12 months that ends with the sale or exchange of the residence. For example, you move out of your principal residence on May 31, 2012, offering it for rental as of June 1. You rent it from June 15 until mid-November, when you sell the house. Under the special rental period rule, your use of the house from January 1 until May 31, 2012, is not counted as personal use. This means that deductions for the rental period are not subject to the rental income limitation (9.9).

EXAMPLES
1. A son rented a condominium in Florida to his parents, who split their time between the Florida apartment and the home they owned in Illinois. Although the parents paid a fair amount for the Florida condo, the son’s rental deductions were limited by the IRS and the Tax Court to interest and real estate taxes that did not exceed the rental income. The parents’ rental days were attributed to the son under the 14 day/10% rental day limit since the home in Illinois, and not the Florida apartment, was their principal residence.
2. You and your neighbor Joe are co-owners of a vacation condominium. You rent the unit out whenever possible; Joe uses the unit for two weeks every year. As Joe owns an interest in the unit, both of you are considered to have used the unit for personal purposes during those weeks.
3. You and your neighbor Tom are co-owners of a house under a shared-equity financing agreement. Tom lives in the house and pays you a fair rental price. Even though Tom has an interest in the house, the days he lives there are not counted as days of personal use by you because Tom rents the house as a main home under a shared-equity financing agreement.
4. You rent a beach house to Jane. Jane rents her house in the mountains to you. You each pay a fair rental price. You are using your house for personal purposes on the days that Jane uses it because your house is used by Jane under an arrangement that allows you to use her house.
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