I need a place to enter the avg rental period of my rental property. If <7 days, it gets reported as a business instead of rental, which means it's not passive income.

[AmeliesUncle · Accepted solution]

For the OP:   You need to go into "Forms Mode", go to the Schedule E Worksheet, and check the "Other Passive Exceptions" box.

And just to clarify for the OP and any other readers what Tageam and I are talking about:

The Regulations for PASSIVE LOSSES say that a rental for less than 7 days or less is not considered a "Passive Activity".  But that is under the rules for PASSIVE LOSSES.  So it is not a "rental activity" for purposes of Passive Losses.

As Tagteam and I agree, because no services are provided, it still properly goes on Schedule E.  It IS still a rental, but just not a rental for purposes of the Passive Loss rules.  

Schedule C is not appropriate because it is not subject to Self Employment Tax.  It IS still a rental, and the rules for Self Employment Tax don't apply to rental (unless services are provided). 

[tagteam]

[ericjford]

@tagteam  - you said "The relevant reg states that rental periods of less than seven days are not treated as rental activities and, hence, get Schedule C treatment (i.e., Schedule E is used to report income or loss from rental real estate, et al)."

The instructions for Form 8582 (Passive Activity Loss Limitations) state that if the activity meets any of the 5 exceptions listed, it's not a rental activity (for the purposes of Passive Losses).  Renting for an average period of customer use of 7 days or less is one of the 5 exceptions.  SO, then Form 8582 states that you must determine if your rental of the property is a trade or business activity, which in my case is Yes, then you must determine if you materially participated, which again is Yes in my case.  Form 8582 Instructions then state "If the activity is a trade or business activity in which you did materially participate, report any income or loss from the activity on the forms or schedules normally used".  This then takes us back to Pub 527, which states "If you rent buildings, rooms, or apartments, and provide BASIC services such as heat and light, trash collection, etc., you normally report your rental income on Schedule E, Part I". 

So I think that is an additional piece of written evidence to justify your position and @AmeliesUncle's position in the next post that this activity gets reported on Schedule E, not Schedule C.

[ericjford]

Thank you for the screen shot, this is very helpful.  I had started this year using TurboTax Online, which doesn't have Forms mode, so I will go back to using the Desktop version so I can access this checkbox.

Thank you very much to both @tagteam  and @AmeliesUncle, you were both extremely helpful.  Your position matches what my conclusion was after many hours or reading the regs.  

[tagteam]

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@ericjford wrote:

So I think that is an additional piece of written evidence to justify your position and @AmeliesUncle's position in the next post that this activity gets reported on Schedule E, not Schedule C.

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Yes, @ericjford, we can agree on that. Further, the fact that the 7-day and 30-day "rules" appear in the Section 469 regs is relevant since that section specifically addresses passive activity losses.

Also, Section 469 basically defines "rental activity" as any activity where payments are principally for the use of tangible property [emphasis added}.

[EricUT03]

Has this since been addressed or do we still need to use "forms mode" to designate on Schedule E that a short-term rental property is non-passive?

[Critter-3]

.

[tagteam]

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@EricUT03 wrote:

Has this since been addressed or do we still need to use "forms mode" to designate on Schedule E that a short-term rental property is non-passive?

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The program will automatically recognize that that scenario as nonpassive.

[EricUT03]

Which program will automatically recognize the scenario as non passive? I’m using TurboTax online, and anything I enter on Schedule E is being treated as passive by TurboTax and the system will not apply my losses to my W2 income even though it is a short-term rental property that I materially participate in. One support person instructed me to put the income and expenses on Schedule C if I want to deduct the losses, but I don’t think it belongs on Schedule C.

[tagteam]

I apologize because I misstated the tax treatment (or it was misleading).

The short-term rentals I was referring to contemplated that the rental was being used as a residence, per Section 280A.

In your case, assuming you are not using the property as a residence, you need to indicate that you materially participated as a real estate professional. Otherwise, any loss would be passive.

[gmyoung]

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The short-term rentals I was referring to contemplated that the rental was being used as a residence, per Section 280A.

In your case, assuming you are not using the property as a residence, you need to indicate that you materially participated as a real estate professional. Otherwise, any loss would be passive.

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@tagteam Can you provide a citation for this? I can find nothing that would indicate a short-term rental must be used as a residence in order to qualify for the 7-day rule exception noted in Publication 925.

[tagteam]

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@gmyoung wrote:

@tagteam Can you provide a citation for this? I can find nothing that would indicate a short-term rental must be used as a residence in order to qualify for the 7-day rule exception noted in Publication 925.

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Can you provide a citation for the rule? 

IRS publications provide guidance but are not authoritative. The temporary regulation where the rule was stated has expired. Below is a link to the permanent regulation.

https://www.law.cornell.edu/cfr/text/26/1.469-1

Note 

(e)(3)(i)-(e)(3)(ii) [Reserved]

[gmyoung]

@tagteam: 

So if I understand your reasoning correctly, what you're suggesting is as follows: The IRS issued temporary rules regarding various exceptions to the definition of rental activity (temporary version here), but these temporary rules have expired and are no longer effective, as indicated by their omission from the permanent version of the rules (here). Because the rules have expired, the only way to apply losses against ordinary income (ignoring the $25K special allowance for individuals under certain income limits) is to be a real estate professional. Am I understanding correctly?

I have a couple questions:

1. Is it possible that, rather than expiring, the temporary rules have not been formally codified and made permanent yet? It seems unlikely that the IRS would issue guidance for 2022 (nonauthoritative status notwithstanding) that explicitly mentions the rule, if it had expired. 
2. I'm not sure I understand the relevance of Section 280A in your earlier post? Do you mean that the 7-day exception only applies to rentals that are residences at described in that section?

I just want to make sure I understand because my taxes due (or refundable) depend heavily on this determination. I want to make sure I get it right.

[tagteam]

The foregoing and subsequent statements below represent my opinion and nothing more as this is one of the grayest or gray areas.

This entire "7-day or less of average use" debacle is just that. There have been virtually no cases exactly on point and Treasury has not provided anything authoritative on this exact issue. Further, again, IRS publications and instructions are not authoritative; they are meant to offer guidance but are superseded by anything to the contrary in the law, regs, rulings, certain court decisions, et al., and they have been wrong in the past and the IRS has had to make the appropriate corrections.

Re Section 280A, I believe that was in reference to another (or similar) issue. Regardless, it is clear that real estate dealers and owners of rental properties who provide substantial services report on Schedule C. It is my opinion, based upon the Code and current regulations, that all other real estate rentals are properly reported on Schedule E.

I am going to page @AmeliesUncle to review this post and provide any further input he deems necessary or desirable.

[AmeliesUncle]

As of now, I'm remaining neutral on whether the 7-day-or-less being non-passive or not (assuming Material Participation). 

While I agree the law says that Regulation is expired, I'm unsure if there are other provisions that still allow some authority to it.  The fact that it is still in the IRS Publication MIGHT indicate there is some legal authority to it still, even if the authority is not as 'high' as a Regulation (but at Tagteam mentioned, the Publication itself has no legal authority).  Or the fact it is in the Publication could just mean the IRS has not closely looked at that Publication for quite a while.