How does the Hobby Loss Rule apply to vacation rentals?
According to tax laws, deductions must be taken only from for-profit activities. Any other type of activity is considered a hobby. Therefore, if the IRS feels that you are not trying to earn an income from your vacation rental, you will not be allowed to deduct your expenses from this “hobby.” For example, if you make little income on your home but have lots of expenses, the IRS might assume that you are not trying to make your vacation rental a for-profit activity. To make it clear that you are actively trying to profit from your vacation rental, you need to keep records of your advertisements, inquiries, bookings, etc. Even if your vacation rental business is suffering in a bad economy, you should keep a copy of all of your listings and document any email conversations with prospective renters (even if they chose not to rent) in order to prove that it is still a for-profit activity.
