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ssosa27406
Returning Member

Vacation home short term rental

We have an beach house as investment property. It rents out weekly 7 months of the year. Can we claim a business loss since the mortgage interest, management fees, utilities, and repairs are more than the income generate? We do not use it for personal use.

2 Replies
LindaA
Level 10

Vacation home short term rental

That depends on your participation in the rental activity and your modified adjusted gross income (MAGI). If you actively participate in the rental activity—for example, if you set the rental terms, approve the tenants, determine and approve major property improvements, etc.—you can deduct up to $25,000 of your rental losses. However, this deduction decreases when your MAGI exceeds $100,000 and disappears completely when your MAGI reaches $150,000.  For more information about deducting rental expenses, please see Real Estate Tax and Rental Property.

 

Note: You'll report the income and expenses from the rental property on Schedule E: Supplemental Income and Loss

Teresa_Brooks
Level 1

Vacation home short term rental

The 7-Day and 30-Day Rules – Rentals are generally passive activities. However, an activity is not treated as a rental if either of these statements applies:

  • The average customer use of the property is for 7 days or fewer—or for 30 days or fewer if the owner (or someone on the owner’s behalf) provides significant personal services.
  • The owner (or someone on the owner’s behalf) provides extraordinary personal services without regard to the property’s average period of customer use.

If the activity is not treated as a rental, then it will be treated as a trade or business, and the income and expenses, including prorated interest and taxes, will be reported on Schedule C. IRS Publication 527 states: “If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C.” Substantial services do not include the furnishing of heat and light, the cleaning of public areas, the collecting of trash, and such.

Exception to the 30-Day Rule – If the personal services provided are similar to those that generally are provided in connection with long-term rentals of high-grade commercial or residential real property (such as public area cleaning and trash collection), and if the rental also includes maid and linen services that cost less than 10% of the rental fee, then the personal services are neither significant nor extraordinary for the purposes of the 30-day rule.

Profits & Losses on Schedule C – Profit from a rental activity is not subject to self-employment tax, but a profitable rental activity that is reported as a business on Schedule C is subject to this tax. A loss from this type of activity is still treated as a passive-activity loss unless the taxpayer meets the material participation test – generally, providing 500 or more hours of personal services during the year or qualifying as a real estate professional. Losses from passive activities are deductible only up to the passive income amount, but unused losses can be carried forward to future years. A special allowance for real-estate rental activities with active participation permits a loss against nonpassive income of up to $25,000 – phasing out when modified adjusted gross income is between $100K and $150K. However, this allowance does NOT apply when the activity is reported on Schedule C.

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