short-term rentals

Sounds like a Sch C/SE to me.

More data would inquire about who furnished the bedding and towels, who cleaned the rooms? If that's you, definitely Sch C.

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I would agree because that averages as 1 customer stays 5 days.

There's no requirement that a "hotel" have multiple units. Many "bed-and-breakfast" type hotels have less than 10 units, and some have as little as 3, so one is possible too (as the tax code has no minimum).

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Maybe - This would likely be classified as an IRC Section 469 (true) Passive Activity. As such it would go on Schedule C but would NOT be subject to Self Employment Tax. SIDE NOTE - I've been a tax pro for almost 30 years and I've used several different professional level software packages. I have NEVER seen one, nor even heard of one, that could deal with this activity properly, though I'm sure there out there. I am certain that this is something that the consumer level software will NOT do properly without a LOT of overrides, most of which are going to be beyond the scope and abilities of a nonprofessional.

One of the questions that comes up with what we call the "Resort Rental" is how to calculate the average rental period. There is some disagreement among knowledgeable professionals. The methods include:

1 - dividing the days rented by the tenants. In your example, 200/40=5 so the average period is less than 7 and this gets treated as a true passive; 2 - divide the rental time periods by the time frames. Most such rentals are done weekly. So if I rented it 13 times from Saturday to Saturday (7-day periods) and rented it twice for 2 consecutive weeks to two families. So now I have 13 7-days rentals and 2 14-day rentals, making the average rental period MORE than 7 days. Assuming this math works it puts the rental back on a Schedule E and removes the more restrictive IRC Section 469 rules.

I am not saying either one is correct. In 30 years I've found that advocates of a particular method are usually able to show good cause why their method is acceptable. I've also found that those opposing a method frequently have an argument as well. Each case is different and has to be assessed by a professional knowledgeable in the area. AND the client has to be able to understand and appreciate the details and the results.

Good luck, Gene E. Utterback, EA, RFC, ABA

I'm a little confused here. Don't we first have to determine whether the individual is operating a business (Schedule C) or is renting residential real property (Schedule E) before we even consider the passive activity rules of Section 469?

If operating a business, then one uses Schedule C to determine profit and loss. If the profit is at least $400 then Schedule SE must be completed. If the business is at a loss, then one must determine whether the losses are allowed under the material participation rules of Section

469. (There is no $25K loss allowance.)

If it is not a business, then it is a passive rental activity and losses are allowed up to the $25K limit.

The referenced audit guide cites the 6 exceptions taken from the Sec.

469 regulations to the definition of a rental. (It's not a rental activity.))

Here are the first two exceptions as they are relevant to the current case:

1. The average period of customer use is 7 days or less. For example: condo rentals, short-term use of hotel/motel rooms, and businesses that rent videos/tuxedos/cars/tools, etc.
2. The average period of customer use is 30days or less and significant personal services are provided with the rental. Examples: hotels and motels.

Here's the definition for significant personal services in bullet 2:

(iv) Significant personal services?

(A) In general. For purposes of paragraph (e)(3)(ii)(B) of this section, personal services include only services performed by individuals, and do not include excluded services (within the meaning of paragraph (e)(3)(iv)(B) of this section). In determining whether personal services provided in connection with making property available for use by customers are significant, all of the relevant facts and circumstances shall be taken into account. Relevant facts and circumstances include the frequency with which such services are provided, the type and amount of labor required to perform such services, and the value of such services relative to the amount charged for the use of the property.

(B) Excluded services. For purposes of paragraph (e)(3)(iv)(A) of this section, the term ?excluded services? means, with respect to any property made available for use by customers?

(1) Services necessary to permit the lawful use of the property;

(2) Services performed in connection with the construction of improvements to the property, or in connection with the performance of repairs that extend the property's useful life for a period substantially longer than the average period for which such property is used by customers; and

(3) Services, provided in connection with the use of any improved real property, that are similar to those commonly provided in connection with long-term rentals of high-grade commercial or residential real property (e.g., cleaning and maintenance of common areas, routine repairs, trash collection, elevator service, and security at entrances or perimeters).

Lastly, there is also a definition of average period of customer use in

1.469-1(e)(3)(iii) that you all can look up. My interpretation of the calculation for this case, where we only have one class of property, is the aggregate # of days the property is rented divided by the # of rental periods. In the case given, that is 200 / 40 = 5 average days of use. As such, we have a business and not a rental activity. It gets reported on Schedule C and if there is a loss, one must look to the material participation rules of Sec. 469 to determine if the losses are allowed.

I have not researched any court cases to see if there has been any success in getting past the regulations 1.469-1T(e)(2)(iii) and

1.469-1(e)(3)(iii).

No. Businesses can be passive activities too.

I agree - no $25K loss allowance. However, if a profit results, it can still be a passive activity. This is important if there are other passive losses.

If there's a profit and other passive losses, one must also look at the material participation rules. Personal services executed by employees count AGAINST the owner.

No, it goes on Schedule E. See Instructions for Form 1040, Schedule SE.

"Income and Losses Not Included in Net Earnings From Self-Employment

"[...] 4. Income from real estate rentals if you did not receive the income in the course of a trade or business as a real estate dealer. Report this income on Schedule E [...]"

Also see Pub 334:

"If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc., who provides services (maid services, etc.) for guests, report the rental income and expenses on Schedule C or C-EZ. If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E."

So, regardless of whether or how passive loss rules apply, it is clear that rental income/loss of the type given in the OP goes on Schedule E and is not subject to SE tax.

[...]

The software I use asks on Schedule C: is this activity subject to self-employment tax? However, as noted above, that is not the correct schedule for the OP's scenario.

Incidentally, a husband/wife qualified joint venture (real estate) does go on Schedule C and is not subject to SE tax (again, not the OP's scenario).

No, you consider the passive loss rules independently of Schedule C or E usage.

There is not a strict correspondence between Schedules C/E and business/rental. In the case of the OP, it is a non-rental activity (for purposes of the passive rules) that nevertheless is reported on Schedule E (because it is supplemental income from rental real estate and the owner is not a dealer nor does he provide tenant services).

According to Pub 925 (the one the OP was looking for):

"There are two kinds of passive activities.

" * Trade or business activities in which you do not materially participate during the year.

" * Rental activities, even if you do materially participate in them, unless you are a real estate professional."

Continuing in Pub 925:

"A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. [...]

"Exceptions. Your activity is not a rental activity if any of the following apply. [the six exceptions as quoted by Alan]"

Applying this to the Kiplinger example, or equally to the OP beach house example, means it was not a rental activity for passive loss purposes (due to Sec 469) yet there was also no material participation. It meets the definition of the first bullet above (trade/business in which you do not materially participate), so the loss was passive. Even if there had been a profit, it would not have been subject to SE tax, as described earlier.

Nor could they use the special $25K passive loss allowance, as the activity was not a rental activity for passive purposes per Sec. 469.

-Mark Bole

I disagree with you and your If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc., who provides services (maid services, etc.) for guests, report the rental income and expenses on Schedule C or C-EZ. If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E.

This person fall into the category of "owner of a hotel, motel, etc" because of the Sec. 469 regulation that treats such short term rentals as one operating a business. See my post for the citations.

As the person is operating a business, income and expense goes on Schedule C. If there is a loss, you look to the material participation rules to see if it is a passive loss.

I think we agree that in the OP's beach house example, there was no material participation and any loss is passive, not even eligible for special "$25K loss allowance with active participation". (Let's *hope* we agree, as that is what the Tax Court decided in the Kiplinger story, based on a cabin put into a rental pool, with 3 rentals for 9 total days in the year).

I think we disagree as to whether Sec. 469 and associated regs are making a global definition of real estate rental activities that are considered a trade/business, vs. just a local definition.

First, note that these two exceptions (7-day and 30-day rentals) are strictly for the purposes of 26CFR1.469-1T (e)(3).

"(ii) Exceptions. For purposes of this paragraph (e)(3), an activity involving the use of tangible property is not a rental activity for a taxable year if for such taxable year-- (A) The average period of customer use for such property is seven days or less; (B) The average period of customer use for such property is 30 days or less, and significant personal services (within the meaning of paragraph (e)(3)(iv) of this section) are provided by or on behalf of the owner of the property in connection with making the property available for use by customers;"

Further, 26CFR1.469-1T(d) seems to clearly limit all Sec. 469 stuff to just Sec. 469.

" (d) Effect of section 469 and the regulations thereunder for other purposes--(1) Treatment of items of passive activity income and gain. Neither the provisions of section 469 (a)(1) and paragraph (a)(1) of this section nor the characterization of items of income or deduction as passive activity gross income (within the meaning of Sec. 1.469-2T (c)) or passive activity deductions (within the meaning of Sec.

1.469-2T (d)) affects the treatment of any item of income or gain under any provision of the Internal Revenue Code other than section 469. "

Further, on the issue of self-employment tax:

"Sec.1402(a)(1) there shall be excluded rentals from real estate and from personal property leased with the real estate (including such rentals paid in crop shares) together with the deductions attributable thereto, unless such rentals are received in the course of a trade or business as a real estate dealer;

There is nothing in Sec. 1.1402(a)-4 that talks about 7-day or 30-day rentals being special.

In the end, whether it goes on Schedule C or E is probably the least important issue as you should get the same result either way, if your software supports it (as Gene mentioned). Explaining it to the IRS is another matter, of course.

-Mark Bole

You should have rest the rest of Reg. Sec. 1.402(a)-4. Specifically the part that reads:

(c) Rentals from living quarters?(1) No services rendered for occupants. Payments for the use or occupancy of entire private residences or living quarters in duplex or multiple-housing units are generally rentals from real estate. Except in the case of real-estate dealers, such payments are excluded in determining net earnings from self-employment even though such payments are in part attributable to personal property furnished under the lease.

(2) Services rendered for occupants. Payments for the use or occupancy of rooms or other space where services are also rendered to the occupant, such as for the use or occupancy of rooms or other quarters in hotels, boarding houses, or apartment houses furnishing hotel services, or in tourist camps or tourist homes, or payments for the use or occupancy of space in parking lots, warehouses, or storage garages, do not constitute rentals from real estate; consequently, such payments are included in determining net earnings from self-employment. Generally, services are considered rendered to the occupant if they are primarily for his convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only. The supplying of maid service, for example, constitutes such service; whereas the furnishing of heat and light, the cleaning of public entrances, exits, stairways and lobbies, the collection of trash, and so forth, are not considered as services rendered to the occupant.

The above is consistent with the relevant sections I quoted earlier. The income is self-employment income subject to SE tax.

[...]

I still don't see anything that says just because average period of rental use was less than 7 days or 30 days, that it suddenly becomes a trade/business subject to self-employment. In both of the OP's examples (Kiplinger blurb, and beach house), no services are provided.

The 7/30-days-of-use rules only apply as far as passive gain/loss rules under Sec. 469. I still don't see where they apply to any other aspect of the tax.

In the Kiplinger or OP beach house example, no services are provided. What am I missing here that you are seeing?

I have personally rented similar properties (cabin in a vacation spot) in the past. You rent for, say, six nights (Sun through Sat), and you agree to clean the sheets, make the beds, do the dishes, take out the garbage, sweep, clean out the charcoal grill cinders, and in general leave the place just as you found it. What services is the landlord providing?

-Mark Bole

(Let's *hope*

Actually, I think the Kiplinger blurb got it wrong, editorially. Now that I've reviewed the court decision behind the blurb, I see that the first important conclusion is that the taxpayer was not entitled to the $25,000 special allowance for losses against nonpassive income. The follow-up conclusion was, well -- then maybe is it a trade/business with material participation? (Answer: no).

The Kiplinger blurb reversed the order of importance of these two conclusions.

The court was applying Sec. 469 rules for both conclusions.

Then, the coup de grâce is, the court determined the petitioner had less than 14 days rental use of a personal residence, so none of his deductions (other than mortgage and property tax) were allowed.

-Mark Bole

Okay, my dense head has finally got it. As the average usage was 7 days or less, it is not a per se rental activity and the $25000 allowable loss is not available. Whether or not the loss is a passive loss depends upon the material participation element of Sec. 469.

For income tax purposes, whether the activity is treated as a business that goes on Schedule C rather than Schedule E depends upon the facts surrounding the rental activity. If one is providing "significant services" for the convenience of the renter, you have a Schedule C business and not a Schdule E rental. "Signifcant services' are usually defined as providing services that go beyond the usual utilities of electricity, gas, heating and trash removal. Regular maid service and cleaning are the usual examples given.

I assume the case is Akers vs Comm'r, T.C. Memo. 2010-85, 4/21/10.

I'm probably beating a dead horse (and I very much appreciation ALL the responses)...

Back to the beach house where the average stay is 5 days. If I am on Schedule E, the $25,000 offset will be available in our software if "active" participation is indicated (and if other qualifications are met, i.e., filing status, income, etc.). The only further question that would prevent it is for personal use of the property--the 14 day/10% rule but my client does not use the property unless he is staying there to do repair work.

If I go to Schedule C, then we get the "material" participation question as well as whether or not the activity is subject to self- employment tax--I'm not sure what type of diagnostics I would get if I said it wasn't subject to SE tax for this activity. This is somewhat academic, as I'm fairly certain we'll show a loss.

I believe this may be what Gene Utterback was referring to, that he hasn't encountered tax software that is set up to properly handle short-term rentals.

And it is possible that my client could meet the criteria for material participation, although I'm not certain how many hours we could count when he travels there to work on the house--I didn't think that 24 hours per day is appropriate, but 8 hours a day seemed somewhat conservative as the only reason he is present relates to the rental house.

The $25000 loss allowance is not available on Schedule E because Sec.

469 says that your 5 day average use disqualifies the property as a rental activity. This is what the Tax Court said in Akers and was reported by Kiplinger. If the owner can pass the material participation rules, then the activity is not passive and all losses are tax deductible to the extent that the individual has taxable income to offset.

You go to Schedule C only if the activity for income tax purposes is a business because the owner is providing significant services for the convenience of the renters. Otherwise, it stays on Schedule E.

True.

Pub 925 has the 7 material participation rules for the owner. The owner only has to meet any 1 of the 7.

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Can you pro-rate. Say you charge a net rent of $1234. $234 is for the services you provide (cleaning, laundry, or if they were senior/ disabled maybe buying groceries or reading to them). So the $1000 goes on Schedule E, no self-employment tax, and $234 goes on Schedule C, self-employment tax.

Nice try, but no cigar! Gene E. Utterback, EA, RFC, ABA

I agree. It's a Schedule C business.

Why? Is there a regulation that says you cannot pro-rate, or a regulation that says that you must? It seems entirely reasonable. What if you sell your cleaning services not only to the people in your own apartment/house for rent but also to other apartments, charging them $234 for the service?