Vacation Home Rules: 14-Day Limit, Deductions, and 1031 Exchanges

Federal vacation home tax rules turn on a single number: 14. Rent your second home for fewer than 15 days in the year, and the rental income is entirely tax-free and doesn’t even go on your return. Rent it for 15 days or more, and every dollar of income from the first day forward must be reported, with a detailed set of allocation and deduction rules controlling what you actually owe.¹

How the IRS Classifies Your Vacation Home

Everything downstream depends on which side of one test your property lands on. The IRS treats the home as a residence if your personal use exceeds the greater of 14 days or 10 percent of the days it was rented at a fair price. Stay below both marks, and the property is treated primarily as a rental business, with very different consequences for losses and deductions.²

Personal use is broader than you might think. It includes any day you, a family member, a co-owner, or someone using the property under a home-swap arrangement stays there. It also includes any day someone stays for less than fair market rent, so donating a week at your beach house to a charity auction adds those days to your personal total even though you never set foot in the place.³

One exception saves many owners. Days you spend doing substantial repair and maintenance work don’t count as personal use, even if your family is on-site enjoying the property. The catch is that you have to be working on maintenance essentially full time that day, not patching a screen door between beach trips.⁴

The 14-Day Tax-Free Rule

Section 280A(g) creates one of the friendliest provisions in the tax code for vacation homeowners. Use the property as a residence during the year, rent it for fewer than 15 days, and you owe no tax on the income and don’t report it at all.¹

There’s no cap on what you can charge. A lake house near a major golf tournament, a music festival, or a college football rivalry weekend can collect several thousand dollars for a few nights, and you keep every dollar. The trade-off: no rental-related expenses are deductible for those days. No form, no election. You simply stay within the 14-day limit and leave the income off Form 1040.⁴

The moment the property is rented for a 15th day, the exemption vanishes entirely. All rental income from day one must be reported on Schedule E. This is not a marginal threshold where only the excess gets taxed. It’s all or nothing.

Splitting Costs on a Mixed-Use Property

When rental crosses the 14-day mark and the home still qualifies as your residence, you allocate every shared cost between the two uses. Mortgage interest, property taxes, insurance, utilities, and maintenance are divided by the ratio of rental days to total usage days. Rent for 60 days, use it personally for 30, and roughly two-thirds of those costs are allocated to the rental side.⁴

Depreciation is a separate deduction for the rental portion. Residential rental property depreciates over a 27.5-year recovery period using the straight-line method, so a small fraction of the building’s value comes off each year. Land itself isn’t depreciable.⁵

Here’s the catch that frustrates most owners. When the property qualifies as your residence under the 14-day/10% test, Section 280A caps your rental deductions at the amount of rental income earned. You can’t use a loss from the vacation home to offset your salary, investment returns, or any other income. Deductions above rental income carry forward to future years, but they never reduce other taxable income while the property is classified as a residence.²

The IRS also dictates the order the deductions come off. Mortgage interest and property tax allocated to rental days go first. Operating costs like insurance, utilities, and repairs go next. Depreciation goes last. That order matters because when the income cap bites, depreciation is usually what gets squeezed out. Any unused amount carries forward.⁴

When the Property Is Primarily a Rental

Keep personal use below the 14-day/10% threshold and the home is no longer a residence for tax purposes. The Section 280A income cap disappears, and rental losses become potentially deductible against other income. Those losses then meet the passive activity rules under Section 469. Rental activity is generally passive, so losses can only offset other passive income unless an exception applies.⁶

The main exception: if you actively participate in managing the rental by choosing tenants, setting terms, and approving repairs, you can deduct up to $25,000 in rental losses against non-passive income like wages. That allowance phases out by 50 cents for every dollar your adjusted gross income exceeds $100,000, disappearing entirely at $150,000.⁶

Mortgage Interest and Property Tax

Even if you never rent the property, a vacation home can generate real deductions. The IRS lets you deduct mortgage interest on up to two homes: your primary residence and one additional qualified residence you designate. The vacation home qualifies as that second residence as long as you use it as a residence under the Section 280A rules, or don’t rent it out at all.⁷

Combined mortgage debt eligible for the interest deduction across both homes is capped at $750,000 ($375,000 if married filing separately) for loans taken out after December 15, 2017. Loans originated before that date fall under the previous $1 million limit.⁷

Property taxes are deductible too, but they fall under the state and local tax cap. For 2026, the SALT limit is $40,000 ($20,000 if married filing separately), covering all state and local income taxes, sales taxes, and property taxes combined across every property you own. If you already hit the cap with your primary residence, the vacation home’s property taxes provide no additional federal benefit.⁸

When the home is rented part of the year, the personal-use share of mortgage interest and property taxes goes on Schedule A as an itemized deduction, subject to the caps above. The rental-use share moves to Schedule E as a rental expense.

The 3.8% Net Investment Income Tax

Rental income can trigger an additional 3.8 percent surtax if your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married filing jointly. The Net Investment Income Tax applies to rental and royalty income, among other investment earnings. Deductible rental expenses reduce the amount subject to the tax, which is another reason careful allocation matters.⁹

Those thresholds are not indexed for inflation, so more taxpayers cross them each year. If the vacation home produces meaningful rental revenue on top of your regular income, this surcharge is easy to overlook during planning.⁹

Taxes When You Sell

Selling a vacation home is a different picture from selling your main house. The familiar capital gains exclusion under Section 121 ($250,000 single, $500,000 married filing jointly) applies only to property you owned and used as your principal residence for at least two of the five years before the sale.¹⁰

Converting the vacation home into your primary residence and living there for two years can qualify you for a partial exclusion. But the gain allocated to “periods of nonqualified use” (years it served as a vacation or rental property after 2008) stays taxable even when you meet the ownership and use tests.¹⁰

Depreciation Recapture

Every dollar of depreciation you claimed, or should have claimed, while renting the property gets recaptured at sale. The recaptured amount is taxed at a maximum federal rate of 25 percent, which sits above the long-term capital gains rate most sellers pay on the rest of their profit. Skipping depreciation during the rental years doesn’t help. The IRS recaptures depreciation you were entitled to take whether you actually took it or not.

Deferring the Gain With a 1031 Exchange

Rolling the proceeds into another investment property through a Section 1031 like-kind exchange defers both capital gains and depreciation recapture. The replacement property must be identified within 45 days and the exchange completed within 180 days.¹¹

A vacation home used personally doesn’t automatically qualify. Revenue Procedure 2008-16 provides a safe harbor: for each of the two years before the exchange, you must rent the property at fair market value for at least 14 days and keep personal use to no more than 14 days or 10 percent of actual rental days, whichever is greater. The same limits apply to the replacement property for the two years after the exchange.¹²

Properties held primarily for personal use, or held for resale, don’t qualify for a 1031 exchange at all. The property has to be held for investment or productive use in a trade or business.¹¹

Rules Outside the Tax Code

Federal tax law doesn’t cover everything that controls a vacation rental. Your mortgage lender classifies the property separately for underwriting: Fannie Mae’s second-home rules require borrower occupancy for part of the year and prohibit properties that function primarily as rentals, and heavy rental use pushes the loan into investment-property territory with a larger down payment and higher rate.¹³ Most cities and counties in vacation markets require a short-term rental permit and collect lodging or transient occupancy taxes on nightly stays, with zoning rules that may cap rental nights or ban short-term rentals in certain districts. If the property sits inside a homeowners association, the CC&Rs often set minimum lease durations or ban short-term rentals outright, enforced through fines and liens. None of these override the IRS rules, but any of them can shut down a rental plan the tax code would otherwise allow.

Records That Hold Up in an Audit

Almost every vacation home tax dispute comes down to documentation. The IRS doesn’t take your word for how many days were personal versus rental. Keep a calendar or log showing each day the property was occupied and by whom, noting whether the occupant paid fair market rent. Save rental agreements, booking platform records, and payment confirmations. For repair days you want excluded from personal use, document the work performed and the hours spent.

On the expense side, retain receipts for every cost you plan to allocate: mortgage statements, property tax bills, insurance premiums, utility bills, repair invoices, and management fees. Sloppy records don’t just risk an audit adjustment. Underreporting rental income can trigger accuracy-related penalties of 20 percent of the underpayment, and in extreme cases of willful evasion, criminal penalties reaching fines up to $100,000 and up to five years in prison.¹⁴

1
Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc.
2
Office of the Law Revision Counsel. 26 US Code 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc.
3
Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property
4
Internal Revenue Service. Publication 527, Residential Rental Property
5
Internal Revenue Service. Depreciation and Recapture
6
Office of the Law Revision Counsel. 26 US Code 469 – Passive Activity Losses and Credits Limited
7
Office of the Law Revision Counsel. 26 USC 163 – Interest
8
Internal Revenue Service. Real Estate Taxes, Mortgage Interest, Points, Other Property Expenses
9
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
10
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
11
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
12
Internal Revenue Service. Revenue Procedure 2008-16
13
Fannie Mae. Occupancy Types
14
Office of the Law Revision Counsel. 26 US Code 7201 – Attempt to Evade or Defeat Tax