Investors & landlords

short-term rentals can be non-passive or passive

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Rental Activities
A rental activity is a passive activity even if you materially participated in that activity. An activity is a rental if real property is used by customers or held for use by customers, and the gross income from the activity represents amounts paid mainly for the use of the property. It doesn’t matter whether the use is under a lease(other than a triple net lease), a service contract, or some other arrangement. 

Exceptions. Your activity isn’t a rental activity (and hence not passive and thus reported on Schedule C)  if any of the following apply:

1. The average period of customer use of the property is 7 days or less. You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. The activity's average period of customer use will equal the sum of the amounts for each class.

2. 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.

   1. Services needed to permit the lawful use of the property;

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

   3. 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.

3. You provide extraordinary personal services in making the rental property available for customer use. Services are extraordinary personal services if they’re performed by individuals and the customers' use of the property is incidental to their receipt of the services.

4. The rental is incidental to a nonrental activity. The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. The rental of property is incidental to a trade or business activity if all of the following apply.

   1. You own an interest in the trade or business activity during the year.

   2. The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years.

   3. Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience.

5. You customarily make the rental property available during defined business hours for nonexclusive use by various customers.

6. You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity.

what would be included in significant services

Substantial services, as described by the IRS, include the following and other “hotel-like” services:

Cleaning the property daily while the same guest occupies it
Changing linens daily while the same guest occupies the property
Conducting outings or guest tours
Providing entertainment and meals
Providing transportation