Short Term Rentals

Short term rentals are very popular these days. Especially on rental sites such as Airbnb and Vrbo. Whether it’s a cottage at the beach, an apartment in the city, or a home in the mountains, short term rentals make it easy to travel and provide a comfortable place to stay. The following will explain some key rental rules and terms relating to these types of investments.

What are substantial services?

Substantial services are included but not limited to cleaning the rental unit while occupied, meals and entertainment, concierge services , guest tours, guest outings, and transportation. Services that do not qualify for substantial services are air conditioning, repairs and maintenance, Internet and TV, and trash collection.

Schedule to report your rental activity: Schedule E vs. Schedule C
There are two schedules which rental activities are typically reported on. Schedule E is the schedule used if substantial services are not provided to the guests. This income is not subject to self-employment taxes. Rentals are reported on Schedule C when substantial services are provided to guests. This income is subject to self-employment taxes.

Passive vs. active real estate activities 
Most rental real estate activities fall under the passive category, are not subject to self-employment taxes, and are reported on Schedule E. Passive rental losses incurred can only be used to offset other passive income. Passive losses are not eligible to reduce income like wages or investment income.

If you actively participate in a rental activity, you may be able deduct real estate losses against non-passive income. You are deemed to actively or materially participate in rental real estate if you satisfy one of the following requirements:

1. You participated in the activity for more than 500 hours.
2. Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.

By actively participating and providing substantial services, your real estate investment for short term rentals are reported on Schedule C. This can provide a huge advantage because if your investment is producing a taxable loss, you will be able to use this loss to offset ordinary income like wages, interest, dividends, or business income.

For more on material participation, short term rentals, and passive vs. non passive rental income, please contact Lance M. Aligo CPA at laligo@krscpas.com or 201-655-7411.