Airbnb Schedule C Property and Improvement Depreciation

[BHancock]

So I just want to check a few things to make sure I am going in the right direction. I have an airbnb that classifies as a Schedule C according to the 2022 IRS instructions. So to do depreciation for a Schedule C Property and Improvements I go to "Wages & Income" > "Self-employment income and expenses" and I do depreciation under "Assets" is that correct?

For the property it will be classified as "J1 - Nonresidential" and will depreciate over the next "39 years" correct?

For property improvements it will be classified as "J5- Qualified improvements" it can depreciate over the next "15 years" or I can do a Section 179 correct?

So assuming that is all correct, I am a bit confused on the depreciation results. For example, if I type $15,000 for "J5- Qualified improvements" and select to spread the deduction over 15 years, it only deducts $500 (increases my refund by $60 [12% of $500] which is only half what it should be, however if I take do a 179 it deducts the full $15,000 (increases my refund by $1,800 [12% of 15,000]. Why is that?

Having a similar issue with the "J1 - Nonresidential". For example, if I paid $100,000 it for some reason is depreciating at $1603 or $62,517 over 39 years. I am confused

One last question, if I do a section 179 or a 15 year spread on the improvements for last year, and this year the property turns into a long term rental or a schedule E, will that complicate things for 2023 tax return?

[RobertB4444]

In the year that you start to depreciate an asset you only get a part year depreciation beginning on the date that you put it into service.  So your first year depreciation is not representative of the whole.  

Structural improvements should be entered as residential rental real estate.  As should your property itself. 

@BHancock 

[BHancock]

So according to: https://www.irs.gov/publications/p925

Under section "Rental Activities"

"Exceptions.

1. Your activity isn’t a rental activity if any of the following apply.
The average period of customer use of the property is 7 days or less."

This statement is true for me as my customers stayed an average of 5 days, so I report this property as Schedule C and as a non residential property for depreciation since its technically a hotel and not a residential rental property... it's a commercial property. Is this correct?

@RobertB4444 

[Vanessa A · Accepted solution]

Yes, you are correct.  This would not be a rental activity since your customers are only staying an average of 5 nights.  Instead, you will want to report your income on Schedule C as self-employment income.  The property would be a business asset and depreciated as a hotel would be depreciated.  

You will enter your income from your AirBnB activity in the business section of TurboTax as a business.  You will also be subject to Self-Employment taxes on this income. 

[BHancock]

My question now is, what happens this year (2023) when I file if I do long term rentals and it converts to a Schedule E? What happens to the property depreciation? On Schedule C its 39 years, and on Schedule E its 27.5 years.

[KrisD15 · Accepted solution]

You would need to enter the property on your Schedule E with the adjusted basis and depreciate 27.5 years. 

The adjusted basis would be the original cost/basis less depreciation taken (or could have been taken) while it was a Business asset (on schedule C) 

When you eventually sell, the depreciation recapture will be Ordinary Income and proceeds above your original cost will be capital gains. 

[BHancock]

@RobertB4444 I just wanted to follow up on your answer. You said that I only get part year depreciation begining on the date that I put it into service, but if you look at the example picture below on the left I entered the $15,000 improvement into service on Jan 1st. If that is the case, wouldn't it be $1000 depreciation, not $500. On the example on the right with section 179 I am able to get the full $15,000. I am confused how this works. With a spread, for 2023 would I get $1000? If so what happens to the other $500 from 2022? Does it carried over to the last year of service, or divided into the next 15 years?

[PatriciaV]

Yes, you take half the year's depreciation in the first and last years of the asset's life.

Notice the regular depreciation method shown on the right is half-year, straight line. According to IRS Pub 946: 

Half-year convention. If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. You deduct a full year of depreciation for any other year during the recovery period.

When you choose the Section 179 deduction, you are expensing the full cost in the first year. There is no depreciation expense in subsequent years.

Choosing one method over the other is a business decision based on the income for this and subsequent years. For more info, see:

• What is straight-line depreciation?
• What is a Section 179 deduction?

@BHancock 

[BHancock]

@PatriciaV 

Thank you for your responses, they have saved me a lot of time digging through for up to date info. I have 1 last question. On my business vehicle if I utilize special depreciation, I say I can deduct up to $19,200 on that first year. Lets say the vehicle is valued at 30k when it went into service. Does that remaining 10.8k get evenly divided into depreciation for the next 5 years?  

[ThomasM125]

The remaining asset cost after subtracting special depreciation does get deducted over five years, but because you are allowed accelerated depreciation, the deduction will be more in the earlier years than in later years. Here is a link to an article to learn more:  Depreciation of business assets

[taxmodern]

The information in this thread about putting an Airbnb on Schedule C is incorrect.  Short-term rentals still go on Schedule E.  Airbnb properties generally should not go on Schedule C.

There are only two situations when rental income can go on Schedule C.  One is "substantial services" (such as providing meals or daily cleanings during guest stays, which is very rare).  The other rare exception is for a real estate dealer (such as someone flipping houses) with incidental rent income during a flip. 

Some of the confusion comes from the "STR rental loophole" which allows you to deduct rental tax losses from your regular income if the average stay is 7 days or less and you qualify for the material participation rules.  But even when using that exception to classify STR income as non-passive, it still doesn't go on Schedule C, it still goes on Schedule E.  The difference is that the tax loss isn't limited by the passive activity rules on form 8582.  Most professional tax software (and some consumer tax software) have an option to specify that rental income is non-passive, and that will cause the Schedule E tax loss for that activity to bypass form 8582.  That's how you do it, not by putting it on Schedule C.

My understanding is TurboTax Online still doesn't yet have a way to correctly report short-term rentals as non-passive.  They may fix that eventually.  But you can with the desktop version of TurboTax, but they don't make it easy.  You have to go into the forms mode on the Schedule E worksheet, then check the boxes "G - Other passive exceptions" and "D - Material Participation".

For people who want to see confirmation of this, see the IRS form 8582's "Rental Activities" section which has a well written explanation of it.  Other references for this include IRS Tax Topic No. 414 which details when to use Schedule C for rentals, and IRS Letter Ruling 202151005  which details when self-employment tax is applicable to rentals (which is equivalent to choosing Schedule C vs. Schedule E).

[Ocalagator]

How do explain the rule of having an average rental duration of >7days to report on a Schedule E and requiring the use of Schedule C for shorter rental terms?

[BHancock]

Not certain I understand your question. But if your asking how do I calculate the average stay, I just take the total number of nights booked in a year and divided by the number of customers I had in a year. Even in the event that I have a property that is over the 7 day average, it may still classify as a schedule c. 

"The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. Significant personal services include only services performed by individuals. To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. Significant personal services don’t include the following.

Services needed to permit the lawful use of the property;

Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental; and

Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs."

I provide entire house cleaning, bed linens and all. I actually have a contract with local cleaners for regular cleaning. Also provide supplies/consumables, unlimited utility usage, 24/7 customer support. I have even delivered pots and pans when a guest requests something specific that they need. 

[Vanessa A]

You do not report it on Schedule E if the average rental days is less than 7 days.  It is considered a business activity and reported on Schedule C.   The Office of Chief Counsel IRS has issued a memo stating "The average period of customer use of the vacation property is seven days, and therefore the activity is not considered a rental activity for purposes of § 469 pursuant to Treas. Reg. § 1.469-1T(e)(3)(ii)(A)" Memorandum 202151005

Basically, since the less than 7 day average removes the activity from being a passive activity and it is not considered a rental activity, it IS considered business activity.  If you are an individual and not a corporation, all of your "rental" activity for the property that has the less than 7 day average will be reported on Schedule C whether or not you provide substantial services. 
 

@Ocalagator 

[M-MTax]

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@Vanessa A wrote:

You do not report it on Schedule E if the average rental days is less than 7 days.  It is considered a business activity and reported on Schedule C.   The Office of Chief Counsel IRS has issued a memo stating "The average period of customer use of the vacation property is seven days, and therefore the activity is not considered a rental activity for purposes of § 469 pursuant to Treas. Reg. § 1.469-1T(e)(3)(ii)(A)" Memorandum 202151005

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The key words are "for purposes of § 469", so unless the owner provides substantial services to the renters or is a real estate dealer, the rental income and expenses are reported on Schedule E, NOT Schedule C.

Even the instructions for Schedule E acknowledge the foregoing:

Generally, rental real estate activity is reported on Schedule E even if it is also a trade or business activity; however, if you provided significant services to the renter, such as maid service, report the rental activity on Schedule C, not on Schedule E. Significant services do not include the furnishing of heat and light, cleaning of public areas, trash collection, or similar services.

Schedule E Instructions