Dividing Expenses Between Rental and Personal Use

When a dwelling unit is used for both rental and personal purposes, you must allocate expenses based on the number of days used for each purpose. For example, if you rent your vacation home for 180 days and use it personally for 20 days, you would allocate 90% of the expenses to rental use and 10% to personal use.

The Bolton split, and why it is worth taking. There are two competing allocation methods for mortgage interest and property taxes specifically, and the difference is money. The IRS position, reflected in IRS Pub. 527, allocates everything on rental days divided by total days of use — 180/200 = 90% in the example above. The Ninth Circuit in Bolton v. Commissioner, 694 F.2d 556 (9th Cir. 1982), and the Tenth Circuit in McKinney held that interest and taxes, which accrue over the whole year instead of only on days of use, must be allocated over 365 days — 180/365 = 49% here. The Bolton method assigns less interest and tax to the rental side, which sounds worse until you see the second-order effect: those two items are subtracted first under the gross-rental-income limitation, so shrinking them frees up more room for the operating expenses and depreciation that would otherwise be suspended, and the personal share of interest and tax remains deductible on Schedule A anyway. The net result is usually more total deduction in the current year.

California sits in the Ninth Circuit, so Bolton is controlling law there. The IRS has not acquiesced nationally, so outside the Ninth and Tenth Circuits taking the position means disclosing it and being prepared to defend it. Run both allocations before you file; the answer is not always obvious, and it changes with your occupancy mix.