Understanding Mixed-Use Properties
Mixed-use properties are dwellings that serve dual purposes – personal residence and rental income generation. Properly allocating expenses between these two uses is crucial for accurate tax reporting and maximizing deductions.
The Time-Based Allocation Method
The primary method for splitting rental expenses is based on the number of days the property is used for each purpose:
Calculate the total number of days the property was used in the year
Determine how many days were for personal use and how many for rental use
Divide rental days by total days to get the percentage for rental expenses
For example, if you rented your property for 180 days and used it personally for 185 days:
180 / (180 185) = 49.3% rental use
Expense Categories to Consider
When splitting expenses, consider the following categories:
Mortgage interest
Property taxes
Insurance
Utilities (electricity, water, gas)
Maintenance and repairs
Depreciation
Special Considerations for Partial Rentals
If you’re renting out only a portion of your home, such as a spare room, you’ll need to factor in space allocation as well:
Calculate the percentage of your home’s square footage used for rental purposes
Apply this percentage to your total expenses before using the time-based allocation
The 14-Day Rule
Be aware of the 14-day rule: If you rent your property for 14 days or less in a year, you don’t need to report the rental income or expenses on your tax return.
Record-Keeping Best Practices
Maintain detailed records of:
Rental periods and personal use days
All expenses related to the property
Improvements and their costs
Seeking Professional Advice
Given the complexity of rental expense allocation, it’s often wise to consult with a tax professional or certified public accountant to ensure compliance with IRS regulations and maximize your deductions.