No Transient Residential Rental Option in Turbotax Premier

[KDS1723]

We have a transient airbnb residential rental property (less than 7-day average stay).  Because it is considered "transient," it is supposed to use the commercial 39-year depreciation table.  But it should still be schedule E passive income (i.e. no schedule C self-employment tax and still subject to passive loss rules).  

The problem is that Turbotax Premier has no category for this.  It's "Property Assets" series of questions, it never asks for the average length of stay.  The only way for me to get this on a 39-year depreciation table would be to lie and say that we are material participation in the property, which we do not.  And if I did lie and say that we were actively involved, it would put me on Schedule C, which is incorrect.  

So I am forced to either do 27.5 year depreciation and Schedule E, or 39-years and Schedule C, but I should be 39-years and Schedule E!!!

[AmyC]

You do need to mark your rental property as commercial property for proper depreciation. You are correct that transient rentals can force you to depreciate at the commercial level. Please follow these steps:

1. open your return
2. return to your rental
3. select Property Profile
4. on What type of Rental is This? select commercial
5. continue through the section to Summary
6. Select Assets/Depreciation
7. Describe this Asset, select Rental Real Estate Property
8. continue
9. Tell Us a Little More, select Non-Residential Real Estate and Improvements
10. continue
11. How would you categorize this asset? Select Nonresidential real estate
12. continue
13. Enter amount paid and land value portion of the price
14. continue entering information

For more on rentals and transiency, see Pub 527.

[KDS1723]

Thanks.  Do you know if this will force me to put this income on schedule C instead of schedule E, or will it still allow schedule E.

Also, we do use the property for personal use as well as rental.  But still mark as commercial?

[PatriciaV]

Begin reporting your rental activity under the Rental Properties topic in TurboTax to create Schedule E where you can report your rental income and expenses. As part of that interview, you will be asked for the number of rental days and personal use days.

The Rental Assets you enter for your Rental Property can be of several types, as AmyC posted above. Commercial properties are often included for Schedule E, so choosing that type of asset will not change your activity from a rental to Schedule C.

[tagteam]

If you provide "substantial services" to your renters, then you would enter the income and expenses on Schedule C.

@AmeliesUncle - do you want to weigh in on reporting under this scenario on Schedule E with a 39-year recovery period?

[AmeliesUncle]

Yes, 39 years would be correct for a "transient" property.  

For the asset classification, you need to call it "non-residential" property to get 39 years.

The first answer above from Amy shows one way you can get TurboTax to do that.  Unfortunately, that also incorrectly shows it as a "commercial" property on Schedule E (but that won't affect any of the tax calculations).

The other option is to enter it a Single Family Home (or whatever the case may be) and when you are entering the assets, enter it as an "other" asset then "other" again.  But then you need to manually enter the depreciation criteria (MACRS, 39 year, Straight-line, etc.).

[tagteam]

I suppose I would simply be questioning whether the property should be classified as Vacation/Short Term on Schedule E as opposed to Commercial since the latter does not seem to fit the scenario described here.

[AmeliesUncle]

You are right, the "Vacation/Short Term" is the correct way to categorize it.  But I don't know if TurboTax will give you the option for entering the Asset as Nonresidential Real Estate that way, so the "Commercial" may be a work-around.

So the best way is to property call it "Vacation/Short Term" and if TurboTax doesn't let you call the Asset "Nonresidential Real Estate", then enter the Asset as 'Other' then "Other' again to manually enter the 39 year Recovery Period.

[tagteam]

There are two separate sections in TurboTax for rental properties (Schedule E). The Property Profile section is where the actual designation (category) is assigned on Schedule E (in this case, it would be "3").

The Assets/Depreciation section is separate and can be manipulated for the correct result (in most instances).

I also find it strange that the property would use a 39-year recovery period rather than 27.5. After all, it is not commercial/industrial real estate, it is residential and it is not being operated in the same manner as a hotel (unless certain services are provided, in which case it would belong on Schedule C with a 39-year recovery period). If this is simply the "length of stay" issue, then we have to address that goofy (and temporary) regulation because, otherwise, where is the authority for the 39-year recovery period?

[AmeliesUncle]

The 'default' for real estate is 39 years.  It can be 27.5 years it if meets certain criteria.  One of the criteria in Section 168(e)(2) for 27.5 years is that 80% of the rental income is from "dwelling units" ... "but does not include a unit in a hotel, motel, or other establishment more than one-half of the units in which are used on a transient basis".

It does not define "transient basis", but in my opinion, a short-term rental would be considered a "transient basis", which would disqualify the 27.5 years.

https://www.law.cornell.edu/uscode/text/26/168#e

[tagteam]

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@AmeliesUncle wrote:

It does not define "transient basis", but in my opinion, a short-term rental would be considered a "transient basis", which would disqualify the 27.5 years.

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That is a good cite and I agree that "transient basis" is clearly not defined. However, "transient" literally means temporary, impermanent, or short-term and those words could conceivably be applicable to renters who rent for a couple of weeks or even a month.

Also troubling (to me at least) is the word "establishment". I have a difficult time understanding how a typical single-family rental home, townhouse, or condo would fit the definition of "establishment". As a result, I believe whoever wrote that section of the Code might have had something else in mind (particularly since that phrase includes the term "more than one-half of the units") [almost sounds like a truck stop or a bunkhouse or something].

[AmeliesUncle]

Yeah, it isn't particularly clear and seems to definitely seems to be aimed at more hotel-style situations.  But as you said, may even a few weeks or a month could be "transient", so I would consider a situation with seven-days-or-less as "transient".  Even if it is a single rental unit, personally, I consider it as "more than one half" of the units being rented on a transient basis.  But that is just my personal interpretation and the way I read it, so perhaps I am wrong.

I don't have a problem with the word "establishment".  In my opinion, pretty much anything could be considered as an "establishment".  I would consider a single-unit rental as an "establishment", unless maybe  it was only available for rent for a short period of time.

[tagteam]

I absolutely agree that "pretty much anything could be considered to be an "establishment""; that is definitely true.

The problem I have is with that entire phrase since it seems to refer to a building or structure of some sort that has more than one unit (and perhaps more than one purpose), hence the wording, "...establishment more than one-half of the units...". 

Additionally note the language in Section 280A(f)(1)(B): 

The term "dwelling unit” does not include that portion of a unit which is used exclusively as a hotel, motel, inn, or similar establishment. 

That clause could have (and should have, in my opinion) read more like, "does not include a unit in a hotel, motel, or similar establishment used on a transient basis". 

[AmeliesUncle]

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@tagteam wrote:

That clause could have (and should have, in my opinion) 

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In my opinion, it isn't worth the effort to argue with the stupidity of what Congress wrote.   😂  That could  involve a lifetime of effort.  😁