My wife and I bought a condo as an investment in a resort area. We put it in a vacation rental program, where it is rented out for periods of typically a week or less. While we make all the decisions about furnishing, maintaining, participating in the condo association, etc., the rental company finds the renters, collects the rents and sends it to us, and takes a commission from the rent as their payment. Pub. 925 says "Your activity is not a rental activity if any of the following apply: The average period of customer use of the property is 7 days or less." We will certainly meet this test.
Is this "not a rental activity" just for form 8582? Do I not use sched E for this? I'm uncertain how to do this. Any advice would be appreciated.
First, use Publication 527, Residential Rental Property, to determine how to report your rental activity, not Publication 925, Passive Activity and At-Risk Rules. The latter publication will help you determine when a loss on the activity may be deducted. Second, the rental of your condo is, indeed, reported on Schedule E.
You will understand the transaction better if you view your property as a "hotel," because that is what you might be deemed to be operating. In that case you are talking about a business, not an investment. The tax consequences will hinge on whether you earned a profit or incurred a loss (and what the average rental period and/or total personal use period was). Your tax accountant should be able to walk you though the mechanics. Kreig Mitchell
Like most rentals, it's unlikely to show a profit after depreciation for at least several years, maybe ever. In fact, for 2006 this property had zero income because it wasn't on the market until December, and not many people go to the beach in December. Personal use for 2006 was zero, personal use for 2007 will most likely also be zero. For a regular house, it's a no-brainer, but that 7-day average rental thing, along with very confusing material participation, active participation, and real estate professional rules, have left me unsure about what to do. My best guess right now is that it goes on schedule E, but it is an "Other Passive Activity" (line 3 on part 1 of
8582), which hoses me tax-wise a bit. I'd love to get it on my wife's Schedule C (she is a full time RE agent (1099 Misc) who also manages all of our rentals; that would really help me.
I am in this exact (almost) situation, except in my case the condo has no cooking facilities, so isn't a "dwelling unit".
But the question is, if you are not in a community property state is this a deemed partnership bewteen husband and wife, and can't go on wife's Sked C?
So I consulted with a CPA, and here is how my situation stands: My wife qualifies as a real estate professional. I have 4 properties (numbers rounded for simplicity):
Property 1 has a gain of $10000 Property 2 has a loss of $9000 Property 3 has a gain of $500.
These are all on schedule E. Property 2 meets the "material participation" test because we personally spent more than
100 hours doing repair work on it, which was more than anyone else (a few hours for a plumber), and we didn't pay anyone to manage it for us (we do all that ourselves). Property 4 has a loss of $8000. This goes on schedule C because the average rental period is less than 7 days, making it a business. Here is my problem: We don't meet the "material participation" requirement for property 4, which means I need to check "No" on line G of schedule C. Unfortunately, my tax software (TaxAct Deluxe) does not allow me to check "No" on this line, and the professional version doesn't either. So now I have to figure this out by hand and mail in a return, instead of e-filing (or get another tax program). Here is how I think it should go:
Since the property 4 business is a loss, and is a passive activity, this gets entered on line 3b of form 8582. Property 1 + 2 + 4 add up to a gain of (10000 + 500 - 8000) = 2500; since property 3 is material participation, all of the loss is deductible, giving me (2500 - 9000) = -6500, which goes on 1040 line 17. It is not subject to the phase-out of passive deductions due to income > $100000. Does this make sense?
Or should my wife's schedule C and the property 4 schedule C be combined onto line 12 on 1040, even though the property 4 schedule C is passive? For my wife's SE calculation, do I subtract 1/2 of the loss from property 4 from her RE professional schedule C? My tax program did this, but it thinks the property 4 schedule C meets the material participation test. Thanks.
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