Short Term Rental exceptions to passive activty

[Maryland12]

The investment property in question is a condominium unit in a beach resort area.   Also, I am not a real estate professional.  The unit is advertised and offered strictly as a 7-day rental with an occupancy of four.  As owners, we provide substantial services, such as, typical household provisioning, non-perishable supplies, parking passes, and cleaning and linen services as part of the leasing agreement.  Inspections for damages also occur every Saturday between rentals.   

We meet all the requirements to designate this as NOT a passive activity below however TurboTax does not provide a provision in their software that corresponds to the exceptions in Publication 925.  It designates this as a passive activity and disallows any current year deductions.  Is there a provision in TurboTax to accommodate this situation?

Under the Material Participation Test, Publication 925, Passive Activity and At-Risk Rules we satisfied tests 1-3:

Material Participation

A trade or business activity isn’t a passive activity if you materially participated in the activity.

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.

Additionally, also from Publication 925, Passive Activity and At-Risk Rules:

Participation. In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity.

Though rental activities even with material participation are considered passive other than for real estate professionals, referencing Rental Activities- Exceptions in Publication 925, Passive Activity and At-Risk Rules these activities are not designated as rental activities under both Exceptions 1 and 2.  The unit is offered to be leased only for 7 day periods (Saturday to Saturday) meeting the 7 Day Rule and substantial services are provided (cleaning and linen services, parking passes, non-perishable supplies) that exceed 10% of the rental income therefore also satisfying the 30 Day Rule.

Rental Activities

A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. See Real Estate Professional under Activities That Aren’t Passive Activities, later. An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. It doesn’t matter whether the use is under a lease, a service contract, or some other arrangement.

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. You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. The activity's average period of customer use will equal the sum of the amounts for each class.
2. The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. Significant personal services include only services performed by individuals. To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. Significant personal services don’t include the following.
   1. Services needed to permit the lawful use of the property;
   2. Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental; and
   3. Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs.

After determining the activities were excepted from classification as rental activities, we used the following guidance under Publication 925, Passive Activity and At-Risk Rules to determine how to report our income and losses:

Activities That Aren’t Passive Activities

The following aren’t passive activities.

1. Trade or business activities in which you materially participated for the tax year.
2. A working interest in an oil or gas well which you hold directly or through an entity that doesn’t limit your liability (such as a general partner interest in a partnership). It doesn’t matter whether you materially participated in the activity for the tax year. However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. See Temporary Regulations section 1.469-1T(e)(4)(ii).
3. The rental of a dwelling unit that you also used 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 home was rented at a fair rental.
4. An activity of trading personal property for the account of those who own interests in the activity. See Temporary Regulations section 1.469-1T(e)(6).
5. Rental real estate activities in which you materially participated as a real estate professional. See Real Estate Professional, later.

You shouldn’t enter income and losses from these activities on Form 8582. Instead, enter them on the forms or schedules you would normally use.

[tagteam]

Do you have a question?

Perhaps we can get @AmeliesUncle to comment?

[AmeliesUncle]

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@Maryland12 wrote:

As owners, we provide substantial services, such as, typical household provisioning, non-perishable supplies, parking passes, and cleaning and linen services as part of the leasing agreement. 

Is there a provision in TurboTax to accommodate this situation?

You shouldn’t enter income and losses from these activities on Form 8582. Instead, enter them on the forms or schedules you would normally use.

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As your last sentence indicated, you don't enter it as a Rental.  You enter it as general business income.

[GeorgeM777]

If you designated the condominium as a personal residence when entering your rental information, you will not be able to deduct rental expenses given that the property was only rented for 7 days.  You might want to check whether you had designated this short-term rental as a personal residence. 

@Maryland12

[tagteam]

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@GeorgeM777 wrote:

.....you will not be able to deduct rental expenses given that the property was only rented for 7 days.

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It is 7-day periods (i.e., the average period of renter use is 7 days) for which the property is being offered. The property was (is) not only being rented for 7 days per year, according to the original post. 

[Maryland12]

It is rented all year in periods of 7 days.  The question really is that it meets the conditions to not be considered a passive activity.  If substantial services are provided it gets into Schedule C territory but if it meets the exceptions in 925 and the material participation it is supposed to be entered on Schedule E without as an operating loss but TurboTax does not have a provision to enter this as far as I know.  Does anyone know how to enter this other than directly on the form?

[AmeliesUncle]

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@Maryland12 wrote:

If substantial services are provided it gets into Schedule C territory but if it meets the exceptions in 925 and the material participation it is supposed to be entered on Schedule E

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No, substantial services makes it business income; do not enter it as a rental.

The 7 day rental and Material Participation just dictate passive versus non-passive if it was on Schedule E.  But in your case, the substantial services puts it on Schedule C.

However, your original post mentioned 8825 and you said "we".  Is this a Partnership?  Or is it just individually owned?

[tagteam]

I agree with @AmeliesUncle 100%.

Also, @Maryland12, there is passive and nonpassive income/loss but don't conflate "nonpassive" with "earned".

[Maryland12]

So it if it non passive under 925 then where do the losses get entered assuming schedule E? 

[tagteam]

Schedule E and your losses are passive unless you meet one of the exceptions in your original post.