Air BnB problem

[Margaret CPA in OH]

At least I think it's a problem.  I've had many folks with residential rentals.  These clients have a million dollar condo on Amelia Island.  Just last week I found out it was being rented out like an air bnb since January 2024.  Client husband had Parkinson's and actually passed this January. Wife will likely die within a month or two.  But the condo was in wife's revocable trust and she was still competent early last year and decided they would no longer be able to use it so to rent it. 

So in ATX I listed it as vacation/short term rental which I think is correct.  And the $27000+ loss is not deductible as unallowed.  Is this because it is short term rental?  Do the losses carry over until income offsets them?  By the end of 2025 this will be in the trust and go to I don't know and almost for sure an attorney will swoop in to manage this which is fine with me.  But how to explain to daughter that the loss is not deductible?  Just the facts, ma'am?

I've had way too many oddities this year!

[Pacun]

I think it was not deductible because she was not actively participating in renting the place. 

In other words, why short term rent since it was available for rent every day since January 2024?

[DANRVAN]

9 hours ago, Margaret CPA in OH said:

And the $27000+ loss is not deductible as unallowed.  Is this because it is short term rental? 

The $25,000 loss allowed for active participation does not apply where the average rental period is seven days or less, per the reg.

[Margaret CPA in OH]

Thanks to you both.  I think the average rental would be 7 days or less as  I counted 38 different rental payments for 49 weeks so math would support that average.  When I selected Vacation/Short Term Rental I suppose the assumption is the average of 7 days or less. I did read up on this but just using belt and suspenders as I am fairly certain there will be push back on why no deduction. Is it correct, though, to assume that eventual net income will be offset by these carryover losses at least?

Thanks again, as always, for the great support and insights here.

 

[Pacun]

So, if you are considering that the place was only available 49 day in the year, $27K is such a big loss.

It is my understanding that lack of customers doesn't convert the property to personal use. If I read correctly, it was not used as personal since January and it was available on line for any renters.  Any ways, you have the fact in front of you and you will be the one with the best answer.

[Margaret CPA in OH]

No, not 49 days, 49 weeks with 38 different renters.  It was a available for 49 weeks from Jan. 20 through year end and apparently was used the whole time through the end of the year.  Most folks were for 1 week but several were for more than one week.  The huge loss is because of depreciation of a unit valued at $880,500 ($30,685), high commissions ($11,066), and high real estate taxes ($14,421) as well as HOA fees of $7200 and a special assessment for insurance of $5148.  This is Amelia Island FL.  The total rent received was $50,500. I couldn't afford to stay there!

[mcbreck]

Are you doing this on Schedule E instead of Schedule C? I've always done short term rentals on Schedule C as they require extensive regular work or you have to pay someone to do that work. In my experience people with Airbnb type rentals do a LOT of work or are paying someone to do that work - it's not a passive business.

[Abby Normal]

21 minutes ago, mcbreck said:

Are you doing this on Schedule E instead of Schedule C? I've always done short term rentals on Schedule C as they require extensive regular work or you have to pay someone to do that work. In my experience people with Airbnb type rentals do a LOT of work or are paying someone to do that work - it's not a passive business.

But they're not doing daily cleanings or providing other services like a hotel. I would go with sch E.

[Margaret CPA in OH]

Schedule E and selected Vacation/Short Term Rental which seems to exactly describe the unit.  No personal use, though.  After wife passes, I don't know where it goes from her trust but am certain I will no longer be involved.  It may be split between surviving daughters who are in tax brackets I could only dream about and they have 'their people.'  The ailing, aging wife has had a special affinity for me for 25 years since I managed the business book for her software company.  She is very special to me.  I will miss her greatly.

[mcbreck]

Per the University of Illinois tax school:

Short-Term Rentals

Short-term rentals primarily relate to stays of less than seven days on average. Short-term rentals aren’t reported on Schedule E. In fact, IRS Publication 527 states that taxpayers should use Schedule C to report rental transactions if the taxpayer provides “substantial services in conjunction with the property or the rental is a part of a trade or business as a real estate dealer.”

Substantial services are tasks that are related to the convenience of the tenant, like cleaning and linen changes. If the taxpayer meets these requirements, there is the potential for more deductions associated with the rental; however, net profits are generally subject to self-employment taxes.

[DANRVAN]

53 minutes ago, Abby Normal said:

But they're not doing daily cleanings or providing other services like a hotel. I would go with sch E.

Correct.  Reg. Section 1.1402(a)-4(c)

As an activity with an average rental of sevens days or less, it does not qualify for the $25,000 passive loss allowance per Reg. Section 1.469-1T(e)(3)(ii)(A).

In order to deduct the loss, the taxpayer must meet the material participation requirements of Reg. Section 1.469-5T(a).

 

[jklcpa]

45 minutes ago, mcbreck said:

Schedule C ... if the taxpayer provides “substantial services

That would be maid service or daily cleaning of rooms/bathroom like provided by a motel/hotel.  Providing for utilities doesn't count, and cleaning/changing linens between tenants doesn't count because it is only freshened for each tenant's arrival but not daily during the stay.

It goes on Sch E as Abby & Dan already explained.

[DANRVAN]

4 hours ago, Margaret CPA in OH said:

there will be push back on why no deduction

Because the law does not allow it.

Seems obvious mom did not meet material participation rules. 

[BrewOne]

Good input--I have a thick file in my tax library on this topic.  Rentals are commonly handled incorrectly; combining the complexity with the explosion of AirBnB plus little IRS pushback--good formula for confusion.

[Gail in Virginia]

2 hours ago, DANRVAN said:

Correct.  Reg. Section 1.1402(a)-4(c)

As an activity with an average rental of sevens days or less, it does not qualify for the $25,000 passive loss allowance per Reg. Section 1.469-1T(e)(3)(ii)(A).

In order to deduct the loss, the taxpayer must meet the material participation requirements of Reg. Section 1.469-5T(a).

 

I thought to be able to deduct the loss you only had to meet the active participation rules, not the material participation.  If the average use is 7 days or less according to Section 1.469-1T(e)(3)(ii)(A), then it appears that it is not a rental activity.  So would that not make it a sch. C activity, with no material participation on the part of the owner?  But with all investment at risk?  I am just asking - this is an interesting discussion.  And I am also curious as to how the average is calculated.  If 9 out of 10 tenants use if for 7 days or less, but the 10th tenant uses it for 6 months, is the average 7 days or less based on 90% of tenants use, or is it 24.5 days based on 9 x 7 plus 182 days, which equals 245 then divide by the 10 tenants.  

[Margaret CPA in OH]

This is a good discussion and the client does not materially participate nor is an active participant, all is handled by a management company.  I'm not worried about the losses, just wondering if they will offset future income.  It doesn't sit right with me on Sch. C as I don't believe there is really a profit motive in the usual sense and it was used for strictly personal vacation time until the clients became too frail to travel.  As it is in the trust and the surviving wife will not last more than a few months at most, and the Sch. E option seemed appropriate, I'm going with Sch. E and let the chips and losses fall where they may for 2025 when it becomes a trust asset.

[Max W]

4 hours ago, mcbreck said:

Per the University of Illinois tax school:

Short-Term Rentals

Short-term rentals primarily relate to stays of less than seven days on average. Short-term rentals aren’t reported on Schedule E. In fact, IRS Publication 527 states that taxpayers should use Schedule C to report rental transactions if the taxpayer provides “substantial services in conjunction with the property or the rental is a part of a trade or business as a real estate dealer.”

Substantial services are tasks that are related to the convenience of the tenant, like cleaning and linen changes. If the taxpayer meets these requirements, there is the potential for more deductions associated with the rental; however, net profits are generally subject to self-employment taxes.

I would be loath to use any information from any university as most are several years behind what is going on the real world.

As for UI, they had a free online course for Offers in Compromise.   I was curious to see what they had, having prepared many OIC's myself.  The UI course had at least one major mistake and several lesser ones and did not present some vital information.  

[Max W]

You can be considered actively participating even if you use a management company, as long as you are involved in the operation of your rental and exercise independent judgment rather than simply ratifying decisions made by the manager, which doesn't appear to applicable in this case.

[DANRVAN]

2 hours ago, Gail in Virginia said:

the loss you only had to meet the active participation rules, not the material participation.  If the average use is 7 days or less according to Section 1.469-1T(e)(3)(ii)(A), then it appears that it is not a rental activity. 

It is not a rental activity for the passive activity rules per Reg. Section 1.469-1T(e)(3)(ii)(A).

You would only report it on Schedule C if services are provided and and subject to SE tax per Reg. Section 1.1402(a)-4(c)

 

[DANRVAN]

1 hour ago, Max W said:

can be considered actively participating even if you use a management company,

But the passive active participation rules do not apply here per Reg. Section 1.469-1T(e)(3)(ii)(A) since; the average rental period is 7 days or less.

Instead, the losses can only be deducted under the material participation rules of Reg. Section 1.469-5T(a).

 

[DANRVAN]

2 hours ago, Margaret CPA in OH said:

It doesn't sit right with me on Sch. C

You do not report on C because your client is not providing services per the regs.

You report on Schedule E as a rental activity even though is is not a passive rental activity per the regs.

In other words, in this case it is reported as a rental on Schedule E; but for purposes of the passive activity rules it is not considered a rental per the regs.  Therefore you do not apply the passive activity rules and the $25,000 allowable loss.

The loss is not allowed unless the material participation rules are met per Reg. Section 1.469-5T(a).

[mcbreck]

On 3/25/2025 at 11:21 AM, BrewOne said:

Good input--I have a thick file in my tax library on this topic.  Rentals are commonly handled incorrectly; combining the complexity with the explosion of AirBnB plus little IRS pushback--good formula for confusion.

I always looked at it that if you rent long term, it's schedule E unless you provide services.

If you rent for less than 7 days at a time, it's Schedule C regardless of whether extensive services are performed. The IRS rule for rental activity states: 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

The second exception is (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

The first exception literally says nothing about services being performed and is solely a time exception. I can't imagine very many WANT to put their rentals on Schedule C as it subjects them to SE tax. It is an exception which requires it.

 

[Slippery Pencil]

On 3/25/2025 at 7:45 AM, Margaret CPA in OH said:

I think the average rental would be 7 days or less as  I counted 38 different rental payments for 49 weeks so math would support that average.  

On 3/25/2025 at 9:43 AM, Margaret CPA in OH said:

49 weeks with 38 different renters.  It was a available for 49 weeks from Jan. 20 through year end and apparently was used the whole time through the end of the year.  Most folks were for 1 week but several were for more than one week. 

How are you coming up with the average rental being less than 7 days?  49 weeks divided by 38 rentals averages to 1.29 weeks or 9 days per rental.  

I realize that simple calculation may not correspond to reality, but the second comment indicates it was rented all 49 weeks, clearly states several were more than a week, and hints none were for less than a week (most were 1 week).  

 

 

 

 

 

 

 

[DANRVAN]

3 hours ago, mcbreck said:

If you rent for less than 7 days at a time, it's Schedule C regardless of whether extensive services are performed. The IRS rule for rental activity states:

You are misreading the passive activity rules per Reg. Section 1.469-1T(e):

(e) Definition of “passive activity”—

(3) Rental activity—

(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;

******************

The exception refers to the definition of a rental activity for the purposes of a passive activity only!  Note how it refers back to (e)(3).

This means that a 7 day or less rental is not a passive activity and the $25,000 allowance for loss does not apply.

Instead the material participation rules of Reg. Section 1.469-5T(a) must be met to deduct a loss.

You only use Schedule C when the services are provided and subject to SE tax per Reg. Section 1.1402(a)-4(c).

If services are not provided, it is a non-passive rental activity.

 

 

 

[DANRVAN]

On 3/25/2025 at 10:42 AM, Gail in Virginia said:

  And I am also curious as to how the average is calculated.  If 9 out of 10 tenants use if for 7 days or less, but the 10th tenant uses it for 6 months, is the average 7 days or less based on 90% of tenants use, or is it 24.5 days based on 9 x 7 plus 182 days, which equals 245 then divide by the 10 tenants.

Actual number of days rented divided by the number of times it was rented will give you the actual average rental period.  

The number of weeks available or days available do not equate to days used.