You are mixing up things and confusing yourself. Just figure out if you report on schedule E or C first, and since you are renting an average of less than 7 days for more than 14 days out of the year, you report on Schedule C for short term rentals which are considered transient much like a hotel or motel is. Then if when you go through the schedule C and asked if you materially participated or not, how you answer that is when the passive or non passive rules kick to determine what other deductions you are entitled too and what limitations too.
