is there a "special case" for LLC owned rental properties with rental period less than 7 days to deduct losses against w2 income?

[tuxedorose]

A CPA (in prior year) prepared my taxes (LLC 1065 and personal 1040) based on  the fact that my rental property has avg rental period LESS than 7 days than my losses can be treated as NOT " passive" on form 1065. in this case they go on page 1 of the 1065 and I did NOT complete a form 8825

the advantage being that on my personal 1040, these losses can REDUCE my W2 taxable income. we did not have to declare myself as self employed .  was this correct?    

 this year im using turbo tax for my 2020 1040 and its telling me i owe self employment tax  because of 'non farm gross income' on my k1 even though this is a year of   "net" loss just like when the CPA prepared return.  where am i going wrong here?

(NOTE: I manually prepared the form 1065 and the K1's but using TT for my personal 1040)

[M-MTax]

You've got a Sec 469 thing and it's a problem because there has been HEATED debate on both sides of this thing. One side says the rentals are regular SCH E rentals and the other says they are a SCH C business. Some of the SCH E folks say that you put rentals there and only put income on SCH C if you provide services to renters. Some of the SCH C folks say you put all the income there and pay self employment taxes  BUT your losses are still passive (HUH?). Anyway, good luck with this because you're going to get 8 different opinions if you ask 5 different people. I say put it all on SCH E and let the chips fall where they may UNLESS you're in the business of running something like a hotel instead of a short term rental property.

[tuxedorose]

wow... i didnt realize this is such an unsettled topic

just to clarify... yes, its 'considered' like a hotel in that its ultra short term stay...

-but my cpa (2 years ago) didnt have me file my 1040 like i was 'self employed',

-there was no sch C,  I paid no payroll taxes etc

-there were 2 numbers on K1,  a net loss and a gross non farm income

-the net loss went onto my Sch E and it was able to reduce my taxable income (w2 income)

-the gross non-farm income didnt show up anywhere on my return

PROBLEM: now that im using turbo tax, the tool is using that gross nonfarm income and saying i owe self employment tax!  am i missing something that the CPA did?

[tuxedorose]

actually . i think the main takeway is that the losses were considered 'active' not passive. thats why the CPA was able to use the losses to count against w2 income and reduce my overall taxable income

[Critter-3]

You just cannot change how the rental is being calculated on a partnership return form 1065 just to suit your personal return.  If you and the other partners want to treat this differently then you will all need to agree to it so what do they say?  

And just because you only rented the property for 7 days doesn't mean it is not a passive activity.  I think  there is more to the story so I highly recommend you and the other partners  talk this over with a local tax pro that is well  versed in this subject matter and can back up their position with IRS regulations. 

[tuxedorose]

@Critter-3   you seem to be responding to a different question . no one is talking about changing a 1065 to suit their own personal returns.   I was referring to IRS Publication 925. Specifically topic number 415 which talks about Short Term Rentals. 

[AmeliesUncle · Accepted solution]

If you provide "services" (such as maid service or meals), it goes on page 1 of the 1065.  You will owe Self Employment tax on any profit.

If you did NOT provide "services" (such as maid service or meals) AND you "Materially Participated", it goes on 8825 and is NOT passive (it can offset your W-2 income).  No self employment tax applies.  The passive vs. nonpassive is dealt with on the 1040.

If you did NOT provide "services" (such as maid service or meals) AND you did NOT "Materially Participate", it goes on 8825 and is *IS* passive (it can NOT offset your W-2 income unless you meet the qualifications for the $25,000 rule).  No self employment tax applies.  The passive vs. nonpassive is dealt with on the 1040.

[tuxedorose]

@AmeliesUncle   Thank you for the detailed response.    Yes we do provide 'services' and I believe we do participate materially.... BUT.... so far 3 years now, we have a net LOSS

1.  when i enter my info into TT (including the k1 which shows a net loss but a gross non farm profit),  it tells me that I need to select non farm or farm optional method to calculate my self employment tax!!   am i doing something wrong?

2. just confirming... you say there is a scenario where gain/loss goes on the form 8825  and if its loss, it can offset income on 1040 but if its gain , no self employment tax is owed ?  

[AmeliesUncle]

You provide services, so it does NOT go on Form 8825.  Because of the "services", if and when there is a profit, you will owe self employment tax (Social Security and Medicare taxes) on the profit.

TurboTax may ask for your non-farm income for purposes of self employment tax, but if you have a loss, that number will be negative, so no self employment tax will apply.

[tuxedorose]

@AmeliesUncle  thanks for your prior response regarding my short term (rentals less thanb 7 days) airbnb rental unit.  I want to make sure that I will not be responsible for self employment tax.  can you please clarify on something you said... 

If you did NOT provide "services" (such as maid service or meals) AND you "Materially Participated", it goes on 8825 and is NOT passive (it can offset your W-2 income).  No self employment tax applies.  The passive vs. nonpassive is dealt with on the 1040.

so if i generate a gain under this scenario you describe (no services provides but yes materially participated).... do I owe self employment tax ?

[AmeliesUncle]

No services equals no self employment tax.

[tuxedorose]

@AmeliesUncle . thanks for clarifying... so to summarize the big picture ... is the following statement true.

the 'perfect scenario' (for  airbnb type rental owners in a partnership/LLC) is to materially participate but NOT provide services. because in this case...

a) when you have a net income - it flows to the partners return as income but NO self employment taxes owed

b) when you have a net loss - it flows to partners return and effectively reduces their W2 income and lowers their taxes owed (ie not treated as a passive loss)

did i capture that correctly?

Thanks!

[RobertB4444]

@tuxedorose  You captured that correctly.  As @AmeliesUncle says - no services equals no self-employment tax.