@Anonymous_ wrote:
When a subsection of a section of the Code or Regulation states, "for purposes of this paragraph", that is precisely what it means; it generally is not applicable to other sections of either.
Moreover, see Section 7805(e) with respect to the expiration of temporary regulations and this one has been around for quite some time.
Finally, note that, although not authoritative, neither the instructions for Schedule E nor Publication 527 mention rental time periods. Rather, both simply state that the activity belongs on Schedule C if the taxpayer provides substantial services or is a real estate dealer.
Pay closer attention to what is described as "for purposes of this paragraph (e)(3)" this is in (e)(3)(ii) - whereas (e)(3)(i) establishes the exception - which is applied "in general, except as otherwise provided in this paragraph" - so clarification in (ii) is in direct reference to (i) - which is not restricted to this section.
Regarding 7805(e) - that is probably the best argument I have heard in opposition to 1.469-1T - but I would find it hard to accept that the courts would through out all authority provided in the 1.469-#T regs.
Someone mentioned that "Even schedule E has a place for short term rentals" - I would like to clarify that we are specifically talking about less than 7 day average stays - which I agree that longer than 7 day averages can possibly be reported on Schedule E, dependent upon services.
I added this as an edit to my previous post
"So, if it can't be a passive rental activity, and it can't automatically be an active rental active - the only other option is to fall under a trade or business - be it active or passive - which is actually reinforced and explicitly explained in the instructions for Schedule E, Form, 8582, Form 1065. Pub 925, and originally elaborated on in Treasury Decision 8175."
So finally - this is 100% backed up through various instructions and publications from 2022.
I'll start with the publication that you mentioned - Pub 527 - without quoting it - it does mention "substantial services" but does not have any reference to time limits - many people tend to conveniently forget the other criteria in 1.469-1T related to 30 days or less with substantial services. This puts Pub 527 very much in light with 1.1402(a)-4 for SE tax on rentals -however something is not 100% congruent, so we can try to examine why. And my first piece of support will show that rentals under 7 days, or over 7 and under 30 with substantial services - are inherently more work intensive than a traditional longer term rental.
Treasury Decision 8175 - the precursor to 1.469
Significant Policy Issues
II. Definition of Passive Activity
B. Rental Activity
"Section 1.469-1T(e)(3)(ii) provides six exceptions to the general rule. The first exception provides that an activity involving the use of tangible property is not a rental activity if, on the average, the period for which each customer uses the property is seven days or less. This exception will exclude from treatment as a "rental activity" most activities involving short-term use of tangible personal property such as automobiles, videocassettes, tuxedos, and tools, and short-term use of hotel and motel rooms. The rationale for the "seven-day rule" is that a customer's use of property for seven days or less generally will require the person furnishing the property to provide services significant enough to justify the conclusion that the person is engaged in a service business rather than a rental activity."
As you can see here, the Substantial Services test is built in to the 7 day rule, bridging the gaps found in 1.1402(a)-4 and Pub 527
Instructions for Schedule E
Passive Activity
"See the Instructions for Form 8582 to determine whether you materially participated in the activity and for the definition of “rental activity.”"
Not much to go off of here - but it does send us to Form 8582 for guidance. But before we go there, lets take a quick trip to Pub 925...
Pub 925 - Passive Activity and At-Risk Rules
Passive Activities
Rental Activities
Exceptions. Your activity isn’t a rental activity if any of the following apply.
1. The average period of customer use of the property is 7 days or less.
...
"If you meet any of the exceptions listed above, see the Instructions for Form 8582 for information about how to report any income or loss from the activity."
Here was have both the 7 day rule - and another reference to Form 8582...so lets go ahead and go there...
Instructions for Form 8582 - Passive Activity Loss Limitations
Rental Activities
Exceptions
a. 7 days or less, or
Reporting Income and Losses From the Activities
If an activity meets any of the five exceptions listed above, it’s not a rental activity. You must then determine:
1. Whether your rental of the property is a trade or business activity (see Trade or Business Activities,
earlier), and, if so, 2. Whether you materially participated in the activity for the tax year (see Material Participation, later).
If the activity is a trade or business activity in which you didn’t materially participate, enter the income and losses from the activity on Part V.
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.
Trade or Business Activities
A trade or business activity is an activity (other than a rental activity or an activity treated as incidental to an activity of holding property for investment) that:
1. Involves the conduct of a trade or business (within the meaning of section 162),
Trade or business activities are generally reported on Schedule C (Form 1040), Profit or Loss From Business
(Sole Proprietorship); Schedule F (Form 1040), Profit or Loss From Farming; or in Part II or III of Schedule E (Form 1040).
That one is a lot - but it explicitly outlines the 7 day rule - says it is not a rental activity, and shows where to report if it qualifies as a business. Note that the reference to Schedule E here is for Part II or III - which is income from Partnerships, S Corps, Estates, and Trusts - not the typical use of Part 1 rental income normally discussed.
And finally since we mentioned income from partnerships - lets finish off the list by taking a look at what partnerships say about rentals...
Instructions for Form 1065 - U.S. Return of Partnership Income
Rental Activities
There are several exceptions to this general rule. Under these exceptions, an activity involving the use of real or personal tangible property isn't a rental activity if any of the following apply.
• The average period of customer use (defined below) for such property is 7 days or less.
Trade or Business Activities
A trade or business activity is an activity (other than a rental activity or an activity treated as incidental to an activity of holding property for investment) that:
1. Involves the conduct of a trade or business (within the meaning of section 162)
So here we have very similar guidance as what we found in 8582 - but the kicker is that this isn't even in relation to Passive Activities, as passive activity is determined at the Partner level, not the Partnership level. So we are even at a more basic test of determining whether it is ordinary income or rental income, without regards to passive/active status - and we are still guided to report it as ordinary income.
That is about the extent of what I have - with literally everything pointing to a less than 7 day average rental to schedule C (for individuals). The only descrepancy that in some cases (1.1402(a)-4 and Pub 524) there is no guidance to the number of days needed with substantial services - however TD 8175 clarifies the reasoning for that - which eliminates the inconsistencies.
You all better enjoy the content of both of my posts before I turn it in to an E-Book 🙂
