Passive vs active activity

[lisainazle]

So confused! We have a cabin (second home) that is a short-term rental. We use a property manager to handle bookings (using her own website and VRBO), pay sales tax, arrange for cleaning, etc. She gets a percentage of the net fees paid by guests. The average stay of guests is 3 days or less. However, we handle all major repairs, pay for maintenance and supplies and the like. We travel there about 12-15 times per year to make improvements and major repairs. For the life of me I can't tell if this is active or passive income. 

The property manager sends us a 1099-Miscellaneous reflecting the net amount we're paid, but a tax guy told me a couple of years ago that we need to report the entire rate as Rent, then show the fees the manager keeps as a deduction (along with other expenses). Is this correct? It hasn't been a problem until this year when our losses are being disallowed because other income over the threshold.

[AnnetteB6]

You do need to report the total income that the property generates.  Then deduct the management fees and other charges that the property manager keeps from the proceeds.  The property manager should be issuing you a Form 1099-MISC reporting the total rent received.  

Short-term rentals are considered to generate passive income.  However, based on the work that you do for the rental property, you are considered to be active participants.  This means that you may be able to use some of the losses from the rental to offset income that is not passive income.  You do have to have an Adjusted Gross Income below certain thresholds to quality as you mentioned.

[tagteam]

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@lisainazle wrote:

we handle all major repairs, pay for maintenance and supplies and the like. We travel there about 12-15 times per year to make improvements and major repairs.

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You should be advised that, per Section 280A(d)(2), a day spent on repairs and maintenance is not considered to be a day of personal use.

In connection with the foregoing, if you used the unit for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the unit was rented at a fair rental, it is not a passive activity.

See https://www.irs.gov/publications/p925#en_US_2022_publink1000104578