Short-Term Rentals: The 14-Day Rule and Personal Use Days

If you’re a real estate investor using the short-term rental (STR) loophole, understanding personal use days is critical.

The IRS’s “14 days or less” rule can have a significant impact on your ability to claim deductions and offset W2 or active business income.

In this blog post, we’ll break down the rules, exceptions, and practical tips to help you maximize your tax benefits.

What is the 14-Day Rule?

The IRS’s 14-Day (or Less) Rule, often called the Augusta Rule, allows property owners to rent out a home for 14 days or fewer during the year without reporting the rental income on their tax return.

If you qualify for this rule:

• Rental income is completely tax-free
• No rental expenses are deductible
• The property is treated as a personal residence, not a rental

This rule applies to primary residences, vacation homes, and second homes, as long as total rental days do not exceed 14 in the tax year.

If you are interested in pursuing the August Rule, make sure you work with competent tax professionals. Taxpayers have historically lost in Tax Court when daily rental rates exceed local market rates. Influencers often promote the Augusta Rule as a way to shelter tens of thousands in taxes but they are often unaware that tax authority exists to the contrary.

What Are Personal Use Days?

The IRS defines personal use days as any time you, your family, or others use your short-term rental property for personal purposes. The key rule is:

You can use your property for the greater of:

• 14 days, or
• 10% of the total days rented.

For example, if your property is rented for 160 days, you’re allowed up to 16 personal use days (10%). Exceeding this limit reclassifies your property as a residence. When that happens, your expenses are limited to the income generated by the property, and you lose the ability to offset other income with rental losses.

What Counts as Personal Use?

The following scenarios typically count as personal use:

• Your Stay: Any time you or your family stay at the property.
• Friends or Family: If friends or family stay for free or at a discount below fair market rent.
• Property Swaps: Exchanging stays with another property owner.

For family members, the rules are stricter. Even if they pay fair market rent, their stay still counts as personal use unless it’s their principal residence (which requires documentation like a change of address).

The Repairs and Maintenance Exception

Days spent performing repairs and maintenance don’t count as personal use, even if others are present at the property. To qualify, the work must be done on a substantially full-time basis, generally interpreted as 4–6 hours per day.

Additionally:

• Travel Days: If the trip’s primary purpose is maintenance, the days spent traveling to and from the property may also be excluded from personal use.
• Mixed-Use Trips: If workdays dominate the trip, the entire trip may be excluded from personal use.

Case Study: Van Malssen v. Commissioner (2014)

The Van Malssen tax court case provides key insights into how personal use days are evaluated:

• Travel Days: The court excluded travel days when the primary purpose of the trip was maintenance.
• Credibility Matters: The taxpayer’s time logs were accepted as credible evidence, underscoring the importance of accurate and consistent record-keeping.
• Work Over Personal Days: Trips were classified based on whether workdays or personal days dominated.

Practical Tips for the First Year

The first year is crucial for leveraging strategies like the short-term rental loophole and cost segregation studies. To avoid issues, follow these tips:

• Limit Personal Use: Keep personal use to 14 days or less.
• Prioritize Tax Benefits: Avoid gray areas—focus on maximizing deductions in year one.
• Maintain Time Logs: Record all workdays with clear, credible evidence.

Common Pitfalls to Avoid

• Misclassifying Days: Even one personal use day can reduce your deductions.
• Mixing Personal and Work Days: If personal use dominates a trip, the entire trip may be reclassified as personal use.
• Inaccurate Records: Inflating hours or inconsistent logs can undermine your credibility during an audit.

Final Thoughts

Personal use days are an essential component of your short-term rental tax strategy. By limiting personal use, focusing on repairs and maintenance, and keeping detailed records, you can maximize your deductions and avoid IRS complications.

If you’re looking for tailored tax strategies for your short-term rental investments, schedule a free consultation with our team.

Transcript

Intro: 0:00 – 0:30

Host: You’re now listening to the Taxmart REI Podcast, the number one tax podcast for real estate investors.

Thomas: Thanks for tuning into this week’s episode of the Taxmart REI Podcast! Today, we’re diving into personal use days—the famous “14 days or less” rule. Whether you’re looking to maximize time at your short-term rental or use the short-term rental loophole, this is critical information for every investor to know.

Sponsor Message: 0:30 – 1:11

Host: This episode is sponsored by Pure Property Management. Recognized by Forbes as one of America’s best startup employers, Pure helps investors maximize rental property returns through proactive, tech-driven management and local expertise. With over 12,000 five-star reviews, they make rental ownership simple. Visit rentpure.com to learn more.

Introduction to Personal Use Days: 1:11 – 2:30

Thomas: Personal use days are a hot topic among short-term rental investors, especially those leveraging the short-term rental loophole. Today, we’ll answer common questions, such as:

• How much time can you personally spend at your property without jeopardizing tax benefits?
• What counts as personal use?
• What are the gray areas to watch out for?
• Ryan: This is an important topic because even a small mistake—like misclassifying personal use—can significantly impact your deductions and tax strategy.

Defining Personal Use Days: 2:30 – 5:00

Thomas: Here’s the rule: you can use your property for the greater of 14 days or 10% of the total days rented. For example:

If you rent your property for 160 days, you can use it for 16 personal days (10%).
If you rent it year-round, the limit could go up to 34 days.

Ryan: But exceeding this threshold reclassifies your property as a residence. When that happens, your expenses are limited to the property’s income, and you lose the ability to offset W2 or active business income with rental losses.

What Counts as Personal Use?: 5:00 – 8:00

Thomas: Let’s break it down:

1. Your Own Stay: Any time you stay at your property for personal use.
2. Friends or Family: If they stay for free or at a discount, it’s personal use—even if they pay less than fair market rent.
3. Property Swaps: Exchanging stays with another property owner counts as personal use.

Ryan: For family members, the rule is stricter. Even if they pay fair market rent, it’s still considered personal use unless it’s their principal residence. Principal residence designation requires evidence like a change of address, voter registration, and more—not something practical for a short stay.

Repairs and Maintenance Days Exception: 8:00 – 12:30

Thomas: There’s an important exception to personal use: days spent performing repairs and maintenance don’t count—even if others are present.

Ryan: The key phrase here is substantially full-time. While not explicitly defined in the tax code, court cases suggest it means working 4–6 hours per day on repairs or maintenance.

Thomas: Travel days may also be excluded from personal use if the trip’s primary purpose is maintenance. For example, if you arrive Thursday night, work Friday and Saturday, and leave Sunday morning, the travel days (Thursday and Sunday) don’t count as personal use.

Case Study: Van Malssen v. Commissioner (2014): 12:30 – 17:00

Thomas: Let’s look at Van Malssen v. Commissioner for insights:

• Travel Days: The court excluded travel days since the trip’s primary purpose was maintenance.
• Mixed-Use Trips: If personal days dominate the trip, it’s personal use. But if workdays dominate, the trip is excluded.
• Credibility: The taxpayer’s time logs were accepted as credible evidence.

Ryan: Keeping credible time logs is essential. The IRS may verify them using bank records, social media, or receipts. Avoid inflating hours or providing inconsistent documentation—it can undermine your credibility in an audit.

Examples of Repairs and Maintenance: 17:00 – 20:30

Thomas: Repairs and maintenance are generally straightforward:

• Stripping wallpaper and painting
• Cleaning and staining a deck
• Weatherproofing doors
• Cleaning carpets

But some activities, like demolishing and remodeling a bathroom, may be considered capital improvements, which have different tax implications.

Ryan: While repairs and maintenance are broader in this context, adding significant upgrades—like a sauna—may not qualify under the same rules.

IRS Scrutiny and Credibility: 20:30 – 25:00

Thomas: A common question is, “How does the IRS know?” The answer? They evaluate everything:

• Does your time log align with other evidence (e.g., bank statements, social media posts)?
• Are the hours realistic for the work you claim?

Ryan: For example, if you log 10 hours for fixing a toilet, that might raise eyebrows. Similarly, if every day in your log is exactly 4 hours, it might look artificial. Be consistent and credible.

Practical Tips for Year One: 25:00 – 29:00

Thomas: The first year is critical for leveraging strategies like the short-term rental loophole and cost segregation. To keep things simple:

• Limit personal use to 14 days or less.
• Avoid inviting friends or family unless they pay fair market rent.
• Ensure all adults present during maintenance trips contribute at least 4 hours of work daily.

Ryan: Avoid gray areas in year one. Once you’ve captured the tax benefits, you’ll have more flexibility in subsequent years.

Common Pitfalls to Avoid: 29:00 – 32:00

Thomas: One common pitfall is misclassifying days. Even one personal day reduces your deductions and can complicate your tax strategy.

Ryan: Another mistake is mixing personal and work days. For example, if you spend most of a trip relaxing and only work for a few hours, the IRS could classify the entire trip as personal use.

Final Thoughts: 32:00 – 34:00

Thomas: To wrap up, personal use days are an important part of your short-term rental strategy. Keep detailed time logs, limit personal use, and focus on maximizing tax benefits, especially in year one.

Ryan: And remember, playing it safe ensures you maximize your deductions and avoid complications with the IRS.

Thomas: Thanks for tuning into the Taxmart REI Podcast! If you need help with tax planning, book a free consultation. If you’re a CPA or EA looking for a career change, reach out to us at onboarding@wholecpallc.com.

See you next week on the TaxSmart REI Podcast!

Disclaimer: This podcast summary and transcript were partly generated and may contain some errors or miss key points from the audio recording.