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Now it is time to decide if you'll be renting your vacation home and how often.

Because owning a vacation home can be expensive, many people rent their hideaways for part of the year to help offset the cost of a mortgage, taxes, and general upkeep. This often works well for the busy person who has little time now to use the home, but looks forward to using it more frequently—maybe even retiring there.

Because the tax rules governing vacation rentals are complex, understanding the implications of renting out your home, and how often, is important before making a decision.

Remember that although you will own two homes, one of them will remain your principal residence for tax purposes. How is it determined which home is your principal residence if you use your vacation home and your first home equal amounts of time throughout the year? Well, the IRS looks at the circumstances surrounding the situation. Whichever location is intended to be your principal place of residence; evidenced by where you reside the majority of your time, where you file state tax returns, where you have your drivers license, banks accounts in the area, receipt of mail at the residence, and the fact that most of your personal belongings are stored in the residence results in that residence being the principal one.

All Personal Use

Assuming you can keep up with the expenses of your vacation home, you can choose to rent the property out 14 days or less, or not at all. It will be yours exclusively and you won't have to worry about finding good renters and cleaning up after them. This is the most headache-free way to go.

The vacation home will be treated as a second personal residence for tax purposes and the rental income is tax-free. This is the least complicated approach from a tax perspective.

Mixed Personal Use

This is also referred to as the hybrid and can be complicated. Vacation homes falling into this category are used by the owner more than 14 days or 10% of the days the home is rented for a fair rent. Expenses of the home are split between rental and personal use and are not deductible in excess of rental income. To complicate matters further, there are two methods that can be used to figure the mortgage and real estate tax deductions for mixed personal use properties.

Primary Rental with Some Personal Use

If you will be renting the home most of the time and your personal use is not more than the greater of 14 days or 10% of the days the home is rented for fair rent, the home qualifies as rental property. All qualifying rental expenses are deductible from rental income. If there is a resulting loss, it is subject to the passive activity rules governing investment property, see the section Buying Investment Property.

SUGGESTION: Days that you spend at your vacation home doing repairs and maintenance don't count as personal use days, even if you bring your family along with you.