Three categories
For tax purposes a second home falls into one of three categories, depending on how many days it’s rented at fair rent and how many days you (or family members, or anyone paying less than fair rent) use it.
1. Rented 14 days or fewer: a personal home
If you rent the home for 14 days or fewer during the year, the rent is tax-free and you don’t report it. You also can’t deduct rental expenses. Mortgage interest and property taxes are deductible as they would be on any personal home, if you itemize.
2. Rented more than 14 days with significant personal use: a mixed-use residence
If you rent the home more than 14 days and your personal use is more than the greater of 14 days or 10% of the rental days, the home is treated as a residence that is also rented. The rent is taxable. Expenses are split between rental and personal use based on days, and rental deductions are limited to rental income. You can’t create a loss, but unused deductions carry forward to future years.
3. Rented more than 14 days with little personal use: a rental property
If personal use stays under that 14-day / 10% threshold, the home is a rental property. The rent is taxable, expenses for rental days are deductible, and a loss may be allowed subject to the passive activity rules. Short-term rentals with an average stay of seven days or less follow special rules that can make the loss treatment better or worse; ask us before you count on a loss.
What counts as a personal day
- Days you, your spouse, or family members use the home, even if they pay rent, unless it’s their main home and they pay fair rent
- Days anyone uses it at below-market rent
- Days used under a home-swap arrangement
Days spent mainly repairing or maintaining the home don’t count as personal use, even if family comes along. Keep a simple calendar.
Mortgage interest and property taxes
Interest on a mortgage for a second home you use personally is deductible as an itemized deduction, as long as total mortgage debt on your main and second homes doesn’t exceed $750,000. That limit was made permanent in 2025. Property taxes count toward the state and local tax (SALT) cap. See our article on itemized deductions for the current limits.
Selling a vacation home
The $250,000 / $500,000 home-sale exclusion applies only to your main home. Gain on a vacation home is generally a taxable capital gain. If it was rented, depreciation is taxed at up to 25%, and a property that qualifies as a rental may be exchanged under Section 1031. The IRS has a safe harbor for vacation homes in exchanges (Revenue Procedure 2008-16) that requires renting at fair rent for at least 14 days and limiting personal use in each of the two years before and after the exchange.
If you convert a vacation home into your main home, part of the gain is still taxable when you sell (see our home-sale exclusion article).
Colorado lodging taxes
Short-term rentals in Colorado are generally subject to state and local sales and lodging taxes, and many towns require a license. Online platforms collect some of these taxes, but not always all of them. Check with the county and city where the home is.
Questions about your situation?
Call us at 303-734-1040 or email 1040@taxshop.tax. We’re an independent Colorado tax practice in Lone Tree, serving clients since 1969.