This is the final article in a five-part series on Passive Activities. (To read the previous articles, click the following links: Part 1, Part 2, Part 3, and Part 4.)

You own a beach cottage or a mountain cabin. As much as you would like to live there year-round, it just is not practical, so you rent it out when you are not using it. Is this taxable income? Can you deduct a loss? As with so much in taxes, the short answer is “it depends.”

First, the good news. If the property was used as your residence and rented for 14 days or less during the year, it is not taxable income. Of course, no expenses are deductible beyond otherwise deductible items such as property taxes and mortgage interest. Suppose the NFL has awarded your city the Super Bowl next year. Hotel rooms are in short supply, so you rent your home to a rabid football fan for $2,000 a day for 10 days. Since the rental did not exceed 14 days, you have tax-free income. No questions asked, $20,000 in your pocket. Unfortunately, few of us will come into such a windfall in our lifetimes.

If your cottage or cabin is rented when not in use by you, there are tax implications. If you did not use the property for personal use (within limits) you can deduct all costs of the rental unit. If you use the property as a personal residence and personally used for more than the greater of 14 days or 10 percent of the total days rented at fair market value, the deductibility of rental expenses is affected. You must allocate rental expenses in the ratio of personal-use days to rental days. Of course, otherwise deductible items such as mortgage interest and property taxes are fully deductible, allocated between Schedules A and E.

Personal-use days are defined as any day, or part of a day, that the property was used by:

1. The owner for personal purposes,
2. Any other person for personal purposes if that person owns part of the property,
3. Any family member of the owner unless rented for use as the family member’s main home at fair rental value,
4. Anyone who pays less than fair rental value,
5. Anyone under an agreement that allows the owner to use other property.

It should be pointed out that personal-use days do not include days in which the owner worked substantially full-time repairing or maintaining the property, even if family members simultaneously used the property for recreational purposes.

Another wrinkle in the rental market is if you only rent a portion of your residence to a third party. In such cases you must make a reasonable allocation of expenses between personal use and rental use. Based upon the average stay of the tenant, whether for the entire residence or a portion of it, the rental may be reported on Schedule C or Schedule E.

A recent development in the short-term rental market is organizations such as Airbnb, HomeAway, or FlipKey, in which you rent your residence through one of these organizations, typically for vacation use. These are particularly attractive if you home can provide a unique vacation experience for the potential tenant.

The rules are basically the same as they would be without the third party assistance provided by Airbnb and similar organizations. However, one needs to be aware of occupancy taxes that are frequently levied by municipalities and be certain to comply with these laws. In some locations, Airbnb collects and remits these taxes.

Vacation home rentals, Airbnb, and other similar arrangements can be fraught with minefields for the unsuspecting landlord. Check with a competent tax preparer before entering into such arrangements, or you may end up with an unexpected tax liability at year end. Legal advice should also be sought to ascertain that all applicable local laws are not being violated.