Sec. 469 says passive losses can only offset passive income. Ideally, the landlord might like to recharacterize the losses as non-passive so that they can offset the landlord’s regular income. Non-passive income is not subject to limitations described under Sec. 469. One way to achieve this non-passive status is to own a short-term rental.
Short-term rentals are granted an exception to the definition of a “rental activity” under Sec. 469 if certain conditions are met.. This is a good thing for landlords who can materially participate in their rental activity but can’t meet the strenuous tests to qualify as a real estate professional.
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To determine whether a short-term rental is reported on Schedule C or E, did you the landlord provide services to the tenants that trip Sec. 1402?
If the answer is yes, report the short-term rental on Schedule C. If no, Schedule E.
The services that trip Sec. 1402 are not the same as the “significant personal services” described in Treas. Reg. Sec. 1.469-1(T)(e)(3)(ii)(B) see paragraph above).
I’ve pasted below what services do trip Sec. 1402:
(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.
Treas. Reg. Sec. 1.1402(a)-4(c)
If you provide services “primarily for the convenience” of your tenants other than those that are customarily rendered in connection with renting rooms, then you have a Sec. 1402 activity.
And if you have a Sec. 1402 activity, the rental is reported on Schedule C and the income is subject to self-employment taxes.
What are services “primarily for the convenience” of your tenants?
Piecing together Tax Court cases shows the following:
Room service
Making beds
Furnishing linens and towels
Providing laundry service
Preparing and serving meals
Sweeping and mopping floors
Dusting and cleaning
Washing dishes
Cleaning bathroom fixtures
Emptying trashcans (in room)
Replacing scattered or misplaced articles
If these services aren't provided to your guests while they stay at your property, then you likely have a reasonable basis to report your short-term rental on Schedule E. This is true even if your short-term rental is not a “rental activity” thanks to the Sec. 469 exception.
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what I could not find clarification for is whether or not the landlord must perform these services or can a management company be used. Of course, if your management company doesn't provide any of these services then the reporting would go on Scheule E.
