Airbnb - 7 Day Rule and Material Participation

[Scorkett]

I run an airbnb that has average rentals under 7 days. Per my understanding, this would be an exception, and this is not considered rental activity.  For me to report my income or loss, I need to determine if my activity is  1- trade of business activity and 2 - whether I materially participate in the activity. If I meet both of these tests, my loss from the airbnb qualifies as non passive and can be used to reduce any other non passive income (IE W2).

Is this understanding correct?

[DianeW777]

It depends. When you rent out your home, make bookings and provide amenities or services, like coffee or breakfast, the IRS may treat you as being self-employed in the vacation rental business.  See the definition for material participation below.  If you meet these tests you can file as a business and not a rental activity.  Basically it's being treated like a hotel instead of residential rental.  Check the information below and then use your facts and circumstances to decide how to report the income.

If you are self-employed, you have to pay self-employment taxes, as well as income taxes. Self-employment taxes cover Social Security and Medicare contributions for income you make when you are in business for yourself (when you make a profit).

• 10 Tax tips for Airbnb Vacation Rentals

The '7 Day Rule' is not specific tax law, rather a general rule that some websites indicate may be helpful to establish a self employment versus a passive activity with special rules for losses when it comes to residential rentals.

Material participation tests. You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests.

1. You participated in the activity for more than 500 hours.
2. Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
4. The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities under Recharacterization of Passive Income, later.
5. You materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
6. The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year