How to declare Short term rental material participation in Turbotax

[peterloo]

I actively manage my short-term rental and pass the tests on material participation. 

According to IRS Section 469, passive loss in such short-term activities is not subject to passive loss activity limitations. However, when I filled in my Schedule E, Form 8582 was still populated and limited the passive loss deductions as my AGI is above 150k.  

Two questions: 

(1) How can I declare the short-term rental and material participation on Turbotax so I can recategorize my short-term rental activity from passive to active? As soon as I fill Schedule E, form 8582 is automatically generated no matter how. 

(2) What is the limit for this deduction?

[Mike9241]

there's a box somewhere to check if you are a real estate professional if you meet the tests. being a REP does not change how your short-term rental should be reported. 

you have not provided sufficient info but it is possible that by providing significant services, the rental should be reported on Schedule C and not Schedule E

If you participate in operating vacation rentals or short-term rentals by providing substantial services it will be classified as a business and you need to report that on Schedule C whereas if your participation is minimal and you offer no substantial services you will report it on Schedule E.

The tax implications of rental income will vary depending on the length of time you rented out your property and to what extent you participated in the day-to-day management of the activity.

The decision whether to opt for Schedule C for rental property or Schedule E depends on a lot of factors. Seek advice from a tax professional to understand how rental income is taxed and ensure you go with the schedule that is legitimate

here are links to other threads about schedule C or E

as you can see this is a complex topic for which you should consult with a tax pro.

https://taxsmartinvestors.com/short-term-rentals-sch-c-or-e/ 

https://theshorttermshop.com/is-short-term-rental-schedule-e-vs-c-and-passive-vs-non-passive-income/ 

[peterloo]

Thanks for the detailed reply. 

I consider Schedule E only. I don't provide substantial services (meal, daily bed change) to be reported on Schedule C. 

According to1.469- 1T(e)(3)(ii), my rental meets the exception rental definition since it has on average 7 days or less (short-term rental). I also materially participate in managing it (remodeling, screening / welcoming guests, cleaning/buying supplies, fixing/repairing and other improvements, etc.). 

Because of the above 2 reasons, I don't need to be REP to qualify and the passive income losses limitations should not apply. I should be able use Schedule E, but clarify my short-term rental (7 days or less) and materially participation so that form 8582 should not limit the passive loss deduction.

However, I can't find a way in Turbo tax to do so. Note that it is not about being REP. I want to make use of the shorter rental exception under Section 469 (or 1.469- 1T(e)(3)(ii))

Thanks a lot for any help, 

[Anonymous_]

---

@peterloo wrote:

Note that it is not about being REP. I want to make use of the shorter rental exception under Section 469 (or 1.469- 1T(e)(3)(ii))

---

You really cannot have it both ways (the best of both worlds) in this instance.

If you want to use the exception in the Reg you cited (or are required to use it), then it is not a rental activity (for the purposes of the passive activity loss rules) and, therefore, the income and expenses are not reported on Schedule E (which is exclusively to report income from rental real estate and royalties).

[peterloo]

Thank you very much. This is very helpful. 

I have W2. I heard that when you have both W2 and Schedule C, the risk of an audit being triggered is high and the audit is very time-consuming.

So, I prefer to use Schedule E if possible. 

I paraphrase your reply and other linked articles to confirm my understanding: 

1. In Schedule E, the only mechanism to deduct a passive loss on active income is to declare REP (subject to passive loss limitations, wipe out if AGI > 150k). 
2. There is no mechanism for Schedule E to make use of Section 469 and deduct a passive loss from active income. 
3. If I want to apply Section 469 exception (short-term + material participation), the only way is to file Schedule C. 

I'm still curious about Schedule E. Other than REP, are there any other ways to use Schedule E and don't generate 8582?

Thanks again for helping

[Anonymous_]

@peterloo 

The points you made in your post are all accurate. 

As for your last query, there is little that can be done to circumvent the passive activity loss rule beyond REP status (and the special allowance where MAGI is under $150k).

[peterloo]

Hi everyone, thank you so much for the thoughtful reply. 

To save your time reading - tl;dr - In 2021, I switched from a long-term rental into STR and provides all services to guests (cleaning, check-in/check-out/welcoming guests, improvement, repairs, supplies). I can pass the material participation test for STR. Hence, I'm pondering between Schedule C and Schedule E. I have filed this long-term rental under schedule E in 2020. Switching to schedule C this year will allow us to deduct on active income since we spent a lot to ramp up the STR business. However, I want to learn more details before making the decision. 

If I switched to Schedule C now (as Section 469 exception), NOL and depreciation are my next topics

• Depreciation: I learned from another thread to close Schedule E and start new on Schedule C. I need to deduct any depreciation I've taken and have a new cost basis in Schedule C. Then, we start depreciation from year 1 on Schedule C. At this point, I should delete Schedule E and its carried-over depreciation from last year. Is it correct?
• NOL: how should I 'transfer' net operating loss from the previous Schedule E over to Schedule C? Or can I move such NOL to other Schedule E properties?

What is your experience in terms of audit triggering? I heard that audit is time-consuming... 

Thank you again