Taiwan vs. U.S. Rental Income Taxation - Part 3: How to Allocate Income When a Property Is Used for Both Personal and Rental Purposes?

In the U.S., it is common for homeowners to rent out part of their property while using the rest for personal purposes. For example, a homeowner may live in their primary residence in a city center while also owning a vacation home by the beach. The homeowner occasionally uses the beach house for vacations, while renting it out for the remainder of the time to generate rental income. In this case, should the rental income from the beach house be reported for tax purposes? If so, what deductible expenses can the homeowner claim? 

Is the Rental Period More Than 15 Days? 

When a property is used for both personal and rental purposes, there are specific tax regulations to consider when reporting rental income. The first factor is the number of days the property is rented out. 

If the property is rented for less than 15 days within a tax year, the rental income does not need to be reported, but at the same time, related rental expenses cannot be deducted. If the property is rented for more than 15 days, the rental income must be reported to the IRS, and related expenses or taxes can be deducted proportionally based on the number of days the property was rented versus the number of days it was used personally. 

Calculating the Rental Space Used and Allocating Related Expenses

For example, Mr. C owns a beach house in the U.S. The house has three separate rooms, each 30 square meters, for a total of 90 square meters. Mr. C rents out one of the rooms, while using the other two as his own living space. Because this property is in a popular vacation area, the rented room is occupied year-round. 

Since the rental period exceeds 15 days, Mr. C must report the rental income to the IRS. However, he can also deduct related expenses proportionally based on the ratio of rental space to personal space:

• Total property size: 90 square meters 

• Rental area: 30 square meters (1 room) 

• Personal use area: 60 square meters (2 rooms) 

• Rental area proportion: 1/3 

• Personal use area proportion: 2/3 

Assume the following income and expenses incurred for the year: 

• Rental income: $36,000 

• Utilities (electricity, gas, water): $3,000 

• Insurance: $3,000 

• Property tax: $9,000 

• Repairs: $6,000 

• Depreciation: $15,000 

Mr. C must report net rental income 24,000 to the IRS. The calculation is detailed as below: 

Rental income		36,000
(deduct)	Utilities	(1,000) (3,000*1/3)
	Insurance	(1,000) (3,000*1/3)
	Property tax	(3,000) (9,000*1/3)
	Repairs	(2,000) (6,000*1/3)
	Depreciation	(5,000) (15,000*1/3)
Net rental income		24,000

Itemized Deductions for Personal Tax Filing 

Now, let’s assume Mr. C opts for itemized deductions when filing his personal income tax. Among the rental related expenses, only property tax is fully deducted under itemized deduction, while other expenses must be proportionally deducted under Schedule E based on rental space usage. Mr. C must file Schedule A (Itemized Deductions) with the IRS.  Below is a comparison of deductible expenses under Schedule E (Rental Income Deductions) versus Schedule A (Personal Deductions):

	Schedule E	Schedule A
Utilities	1,000 (3,000*1/3)	Not deductible
Insurance	1,000 (3,000*1/3)	Not deductible
Property tax	3,000 (9,000*1/3)	6,000 (9,000*2/3)
Repairs	2,000 (6,000*1/3)	Not deductible
Depreciation	5,000 (15,000*1/3)	Not deductible
Total deductions	12,000	6,000

From this table, it is evident that many expenses deductible for rental income (Schedule E) cannot be deducted under personal tax itemization (Schedule A). Common non-deductible items include: 

• Utilities (electricity, gas, water) 

• Insurance 

• Repairs 

• Depreciation 

The above expenses are classified as personal expenses and cannot be deducted from personal income. Additionally, repair costs are considered capital improvements, which may only be deducted when the property is sold. Depreciation can only be deducted for the rental portion of the property and not for personal-use areas. Also, depreciation cannot be claimed while applying itemized deduction. 

Conclusion 

In reality, property taxation involves additional factors such as passive income and loss rules, as well as investment income tax regulations. When filing personal income tax, it is advisable to consult a professional accountant to ensure compliance and maximize tax benefits.