Providing substantial services in (STR) Rental Property held in LLC, do I file a Schedule C or E?

[slee15]

Background: My wife and I own a Short Term Rental Property that is held in a partnership LLC where we provide substantial hotel-like services (e.g.,  daily cleaning, in-room coffee, fresh linens and towels, pool, etc.).  The LLC is registered in Delaware and we file a Federal Business Tax return annually.  We each receive a K-1 with a net rental real estate LOSS.  We are not real estate professionals.  However, we satisfy the requirements for STR Tax Loophole (e.g., guest stays on average less than 7 days, we materially participate, etc.) for non-passive income.  

Questions:

1) Do we file Schedule C or E?  When I try to file under Schedule C, TT asks us similar questions as the Business Tax Return which I already filed.  If I file it under Schedule E, TT classifies it as a passive loss and outputs a zero instead of a loss.  

2) Should we dissolve LLC to make future filings easier? 

Thank you!

Reference: https://ttlc.intuit.com/turbotax-support/en-us/help-article/form-1040/report-rental-schedule-e-sched...

[MarilynG1]

The rule you may be referring to  is called the '14 day rule' which means you rent the property out less than 14 days the entire year, and use it for more than 14 days yourself.  

This doesn't sound like it applies in your case, and your STR is 100% Business, with no Personal; is that correct?

In that case, you would file a Schedule C to report income/expenses.  

You could use Schedule E if you be sure to indicate that you 'rented all year' and had 0 personal days; in other words 100% business use in the Property Profile section.

Here's some Tax Tips for Airbnb, HomeAway, etc. that may be helpful and also detailed info from the IRS on Renting Vacation Property. 

[M-MTax · Accepted solution]

If you and your wife own an STR with substantial services in an LLC and don't hold your interests as community property in a community property state then you file neither a Schedule C or E......you file a 1065 because this is a partnership and issue a K-1 to each of you. 

[slee15]

If I file a Schedule C, it would be a duplication of my LLC business tax filing where I answer the same questions of income and expenses.  The LLC tax filing generates a K-1 for us.   But there is no place to enter a K-1 in the Schedule C.  

However, the Schedule E does have a place for K-1s but TT then categorizes it as passive loss vs. the expected non-passive loss.

[slee15]

My assumption is that a STR property with substantial services provided and material participation would qualify for non-passive income / loss.  Does filing a 1065 using the K-1s from my LLC create a non-passive loss?

Thanks!

[M-MTax · Accepted solution]

Yes, it would create a non-passive loss on your K-1 and since you provide substantial services net income on your K-1 would be subject to self-employment tax.

With your facts and your LLC under no circumstances would you file a Sch C or E. File a 1065 for the LLC.