Short term rentals that you DON'T "Materially Participate" are passive. Short term rentals that you DO "Materially Participate" are non-passive. Self Employment Tax has nothing to do with it being long term, short term, passive, or nonpassive. It is based on if "services" (such as maid service and meals) are provided to the tenants.
not quite. material participation is not the only factor for determining whether short-term rentals are passive or active.
The general rule is that any rental activity is a passive activity [IRC Sec 469(c)(2)]. However, an activity involving the use of tangible property (like a house) is not a rental activity (not passive) for the tax year if [Temp Reg 1.469-1T (e) (3)(ii)]:
1) average period of customer use is 7 days or less or
2) average period of customer use is 30 days or less and significant personal services (SPS) are provided
what are SPS
Significant personal services only include services performed by individuals, and do not include excluded services. In determining whether personal services provided in connection with making property available for use by customers are significant, all of the relevant facts and circumstances shall be taken into account. Relevant facts and circumstances include the frequency with which such services are provided, the type and amount of labor required to perform such services, and the value of such services relative to the amount charged for the use of the property.
The term “excluded services” means, with respect to any property made available for use by customers—
(1) Services necessary to permit the lawful use of the property;
(2) Services performed in connection with the construction of improvements to the property, or in connection with the performance of repairs that extend the property's useful life for a period substantially longer than the average period for which such property is used by customers; and
(3) Services, provided in connection with the use of any improved real property, that are similar to those commonly provided in connection with long-term rentals of high-grade commercial or residential real property (e.g., cleaning and maintenance of common areas, routine repairs, trash collection, elevator service, and security at entrances or perimeters).
Examples of Substantial Services:
Cleaning of the rental each day while the property is occupied by the same guests.
Changing bed sheets and other linens each day while the property is occupied by the same guests.
Concierge services.
Conducting guest tours and outings.
Providing meals and entertainment (like providing breakfast each morning).
Providing transportation.
Providing other “hotel-like” services.
Regrettably, the IRS hasn’t provided much guidance other than the few items above. There aren’t any court cases, Revenue Rulings, or Treasury Regs on this topic.
The activities listed above are not considered rental activities. However they are still passive if there is no material participation.
passive STR are reported on schedule E
nonpassive STR are reported on Schedule C and profits are subject to self-employment tax.
