How Does the 14-Day Personal Use of Rental Properties Apply to Partnerships?

With the popularity of short-term rental investments, it’s not uncommon for investors to use them as vacation homes while at the same time collecting the tax benefits from the property.

This generally works out because you can stay at the property for the greater of 14-days or 10% of the total days you rent it to third parties at the fair market rental price, without having to claim the property as a residence losing out on the tax benefits.

But what about properties acquired by partnerships? Is this 14-day rule applicable to the partnership as a whole, or each individual partner?

Why It Matters

If you’re trying to use the short-term rental loophole to generate non-passive losses to offset your non-passive income (e.g. W-2 and active business income), then you can’t use the property personally for more than the greater of 14-days or 10% of the total days you rent it to third parties at the fair market rental price. 

If you do, then the property is considered a residence. Rental losses on residences are limited to the income the property produces. In other words, it cannot generate a loss.

It’s also important to note that not only the days you spend at the property are considered personal use. But also the days your siblings, spouse, ancestors, and lineal descendants do as well.

This begs the question, but what about partners?

Does the rule apply to individual partners or the whole partnership?

If you’re thinking about partnering up to acquire a short-term rental property, you and your partner(s) might be hoping to have it double as a vacation property as well. 

While there isn’t clear guidance on this issue, based on Sec. 280A(d)(2), it appears that the 14-day rule applies to the partnership as a whole and not to each individual partner (the same goes for S-Corps.)

This indicates that between you, your relatives, partner(s), and their relatives, you have a total of 14 personal use days. 

Having said that, there are also additional complications with allocating expenses to personal use vs fair rental days as well. Not to mention the material participation tests, even if the 14-day rule was a non-issue, in order to turn losses non-passive, each partner would have to spend more than 500 hours on the activity. Otherwise generally only one partner could claim them as non-passive.

What Should You Do?

The simplest answer is to not use properties you hold in a partnership for personal use at all. Instead, if you’re going to partner on short-term rentals, keep it strictly business. 

If you want to have a property double as a short-term rental and vacation home, then purchase it personally and avoid partnerships. You’ll avoid a lot of issues.

Another option is to strategically plan the performance of repairs and maintenance on the property. Days you stay at the property to perform repairs and maintenance are generally not considered personal use days if you work more than four hours at the property – even if you have others stay at the property with you.

The Bottom Line

As with other tax-related issues surrounding short-term rental properties, there is not always a definitive answer. 

We have to remember these rules were written decades ago with hotels in mind, before the proliferation of Airbnb and other platforms that created the robust short-term rental market where we have today.

And while additional research or guidance from the authorities may uncover a clearer answer, it appears safe to say that partnerships considering the acquisition of short-term rental properties may be better off keeping it strictly business.