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Level 2

Question

STR as a business - offset active income

Forum|Forum|4 years ago
January 31, 2022
2 replies
0 views

Hi,

I run an STR that should not be considered a rental according to the requirements outlined in this article:

https://www.therealestatecpa.com/podcasts/str-02-the-details-on-using-short-term-rentals-losses-to-reduce-active-income-technical-details

1. Any concerns with this strategy?

2. How do you get Turbotax Desktop Home & Biz to recognize this on Schedule E? I have checked boxes for Commercial property, Active Participation, and Material Participation, but it still will not allow it to offset active income.

Thanks for your help!

TurboTax Home & Biz Windows

ColeenD3

Level 15

I think you need to not rely on this article and do your own research. While I can't see especially false, I think it's oversimplified.

See IRS Pub 527 for in-depth information.

"Dwelling unit.

A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. It also includes all structures or other property belonging to the dwelling unit. A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities.

A dwelling unit doesn’t include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment. Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and isn’t used by an owner as a home during the year.

Example.

You rent a room in your home that is always available for short-term occupancy by paying customers. You don’t use the room yourself and you allow only paying customers to use the room. This room is used solely as a hotel, motel, inn, or similar establishment and isn’t a dwelling unit."

Be careful with the QIP. While there is some truth about transient property being nonresidential, the law was meant for truly nonresidential buildings such as offices, etc. QIP

klag176Author

Level 2

Thanks so much @ColeenD3 . I will be sure to review this in more depth and I am also investigating Pub 925 which is where a lot of the detail for that article came from.

Assuming I find this approach appropriate, do you have an insight as to how I can make Turbotax consider my Schedule E losses as Active Material participation and therefore have them offset other Active income? Which field in Schedule E or elsewhere "controls" this?

Thanks

Mike

ColeenD3

Level 15

PUB 925 defines active participation.

Active participation.

Active participation isn’t the same as material participation (defined later). Active participation is a less stringent standard than material participation. For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions.

There is a screen at the beginning of the Rental section that will ask you.

AmeliesUncle

Level 15

@klag176 wrote:
I have checked boxes for Commercial property,

I'm glad you found the "Other non-passive exceptions" box.

I'm really curious though ... what is the situation that this is a COMMERICIAL property, that is being rented for short-term rentals?

klag176Author

Level 2

From my understanding, a property is deemed commercial if average stay is under 7 days, which puts it in same classification as a hotel.

Combined with below, this would mean the activity is not considered "rental activity" per IRS regs provided you meet the "material participation" requirements (which are stringent).

This makes the income active, and can then offset other active income.

I am not a CPA so I am going off the original article by a respected CPA plus my own research. If you have insights to contribute to this concept I definitely welcome them.

Per PUB 925

Activities That Aren’t Passive Activities

The following aren’t passive activities.

Trade or business activities in which you materially participated for the tax year.
A working interest in an oil or gas well that you hold directly or through an entity that doesn’t limit your liability (such as a general partner interest in a partnership). It doesn’t matter whether you materially participated in the activity for the tax year. However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. See Temporary Regulations section 1.469-1T(e)(4)(ii).
The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental.
An activity of trading personal property for the account of those who own interests in the activity. See Temporary Regulations section 1.469-1T(e)(6).
Rental real estate activities in which you materially participated as a real estate professional. See Real Estate Professional , later.

AmeliesUncle

Level 15

@klag176 wrote:
Hi
From my understanding, a property is deemed commercial if average stay is under 7 days, which puts it in same classification as a hotel.

No, it still wouldn't be commercial, unless possibly if you provide "services" (such as maid service or meals) to the tenants (and that would change how you need to report it anyways).

However, the short term rental means it is not a "rental" for purposes of the Passive Loss rules. However, as you pointed out from Publication 925, "Trade or business activities in which you materially participated for the tax year."

So you would need to determine if the rental rises to the level of a "Trade or Business". Unfortunately, there is no clear-cut answer for that, but my first thought is that a short-term rental of 7 days or less likely does rise to the level of a "trade or business".