Airbnb Rentals - Schedule C or E?

Technical topics regarding tax preparation.
#1
FLAcct  
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I have a client who has an entire house that he rents out via Airbnb. There is no personal usage.

I have been trying to determine where to report the income/expenses for this property - Schedule C or E - and have done a lot of research into this subject. From the documents I have read, my understanding of the correct reporting is:

For a property that has an average rental period of less than 7 days - Schedule C

For a property that has an average rental period of 7 - 29 days - Schedule C if substantial services are provided (i.e. daily linen changes, daily cleaning, clean towels provided, etc.) - Schedule E if no substantial services are provided (only cleaning at end of term).

For a property that has an average rental period of 30 or more days - Schedule E

Do you agree with my understanding?
 

#2
JR1  
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There's at least one fairly long thread on this....
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#3
makbo  
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You also neglected to mention Schedule SE - which is a separate issue from Schedule C or E.
 

#4
EZTAX  
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Here you go:

viewtopic.php?f=8&t=5504&p=55688&hilit=airbnb#p55688

I find this area to be quite confusing, best of luck. There does not appear to be a great deal of agreement regarding how to handle it.
 

#5
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FLAcct wrote:
Do you agree with my understanding?

No. Whether something goes on C or E depends on whether it’s a business or not. And that determination *isn’t* made by what Section 469 says…since that section deals with *activities,* which may or may not be businesses…and it only deals with a certain aspect of those activities. Namely, if those activities are passive or not. The actual determination of ‘business or not a business’ isn’t made by Section 469. And last time I checked, Section 1402 doesn’t reference Section 469.
 

#6
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1.) Somebody please point me to an authoritative source that says that a rental activity that's got an average rental period of less than seven days goes on Schedule C.

2.) I've always heard that as a general rule (like, I'm allowing for an exception, maybe), things that get reported on Schedule C also get reported on Schedule SE. Will someone confirm that please.

3.) What does airbnb have to do with the question(s) raised by this post?
 

#7
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Harry Boscoe wrote:2.) I've always heard that as a general rule (like, I'm allowing for an exception, maybe), things that get reported on Schedule C also get reported on Schedule SE. Will someone confirm that please.

3.) What does airbnb have to do with the question(s) raised by this post?


The first exception on SE tax I ever learned was notary income. Some things go directly on SE without C, and vice versa. Most if not all of it would be documented in pubs/instructions, or in the code.

According to instructions, "You must pay SE tax if you had net earnings of $400 or more as a self-employed person. If you are in business (farm or nonfarm) for yourself, you are self-employed."

To be determined: is a short-term rental with no daily services provided a trade or business? If the renter is obliged to clean up after their short-term stay (either through their own labor, or hiring a third party), is that providing service?

AirBnb does not raise any issues not already addressed in the tax law; however, for many professionals (including me) it leads to tax situations they probably rarely encountered before AirBnB existed.
 

#8
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[quote="Harry Boscoe"]1.) Somebody please point me to an authoritative source that says that a rental activity that's got an average rental period of less than seven days goes on Schedule C.


Reg §1.469-1T General rules (temporary).

Rental activity.


1.469-1T(e)(3)(i)(i) In general. Except as otherwise provided in this paragraph (e)(3), an activity is a rental activity for a taxable year if—


1.469-1T(e)(3)(i)(A)(A) During such taxable year, tangible property held in connection with the activity is used by customers or held for use by customers; and


1.469-1T(e)(3)(i)(B)(B) The gross income attributable to the conduct of the activity during such taxable year represents (or, in the case of an activity in which property is held for use by customers, the expected gross income from the conduct of the activity will represent) amounts paid or to be paid principally for the use of such tangible property (without regard to whether the use of the property by customers is pursuant to a lease or pursuant to a service contract or other arrangement that is not denominated a lease).

1.469-1T(e)(3)(ii)(ii) Exceptions. For purposes of this paragraph (e)(3), an activity involving the use of tangible property is not a rental activity for a taxable year if for such taxable year—


1.469-1T(e)(3)(ii)(A)(A) The average period of customer use for such property is seven days or less;


1.469-1T(e)(3)(ii)(B)(B) The average period of customer use for such property is 30 days or less, and significant personal services (within the meaning of paragraph (e)(3)(iv) of this section) are provided by or on behalf of the owner of the property in connection with making the property available for use by customers;


1.469-1T(e)(3)(ii)(C)(C) Extraordinary personal services (within the meaning of paragraph (e)(3)(v) of this section) are provided by or on behalf of the owner of the property in connection with making such property available for use by customers (without regard to the average period of customer use);


1.469-1T(e)(3)(ii)(D)(D) The rental of such property is treated as incidental to a nonrental activity of the taxpayer under paragraph (e)(3)(vi) of this section;


1.469-1T(e)(3)(ii)(E)(E) The taxpayer customarily makes the property available during defined business hours for nonexclusive use by various customers; or


1.469-1T(e)(3)(ii)(F)(F) The provision of the property for use in an activity conducted by a partnership, S corporation, or joint venture in which the taxpayer owns an interest is not a rental activity under paragraph (e)(3)(vii) of this section.
 

#9
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From the regulation above:
"1.469-1T(e)(3)(ii)(ii) Exceptions. For purposes of this paragraph (e)(3), an activity involving the use of tangible property is not a rental activity for a taxable year if for such taxable year—
1.469-1T(e)(3)(ii)(A)(A) The average period of customer use for such property is seven days or less..." [emphasis added]


How does this provision make the activity a trade or business, and possibly also subject it to SE tax, I would ask. Neither of those is dealt with in "this paragraph (e)(3)," is it?
Last edited by Harry Boscoe on 29-Aug-2017 9:06am, edited 1 time in total.
 

#10
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And this Tax Adviser article http://www.thetaxadviser.com/issues/201 ... ry-09.html talks about the difficulty to which Harry alludes, and adds some discussion of section 1411 without even mentioning SE tax or Schedule C.
 

#11
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It's yet just another instance of the subtle sneaky slippery subversive sinister conspiracy between Congress and the Treasury...

[did I mention "secret" too? :shock: ]
Last edited by Harry Boscoe on 29-Aug-2017 9:36am, edited 1 time in total.
 

#12
Nilodop  
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And here is a brief intro to a 1955 University of Chicago Law Review article that shows how old this issue is, even before we add today's complexities such as SE tax, passive activity treatment, and 1411 tax. Harry was not one of the authors, but he may have been consulted by them. :P https://www.jstor.org/stable/1598248?se ... b_contents
 

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#14
Nilodop  
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I went there and was making good progress reading it until I stopped and read many times the phrase "committee report that would purport to support" something or other and I became mesmerized by that beautiful language that I must not have read previously or I'd have been mesmerized back then and I'd have quit reading like I just now did.
 

#15
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This is a good read with good references.
http://www.legalbitstream.com/scripts/i ... 3d7f/5/doc
 

#16
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Harry Boscoe wrote:How does this provision make the activity a trade or business, and possibly also subject it to SE tax, I would ask.

And I would answer, “It doesn’t.” It’s surprising that Keyad wrote all that, given the big hint dropped in Post #5.
 

#17
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Jeff-I am not sure if I agree with post #5.

Whether something goes on C or E depends on whether it’s a business or not


Don't we have a directive from the service and the courts that if the average rental days is less than 8, it goes on Schedule C.

Bailey v Commissioner TC Summary Opinion 2011-22 (3/2/11)
 

#18
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Which part of the case are you talking about – this one?

The Inn activity is reported on Schedule C because managing a property with a short rental period is akin to running a business.

If it is, I don’t read it this way:

“Any and all real properties, no matter the level of involvement, and no matter the number of times rented during the year, go on Schedule C if the rental period is less than 7-days.”
 

#19
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469(c)(2). See Scheiner v. Commissioner, supra;
Mordkin v. Commissioner, supra. * * *
We reiterate the holding in Bailey that a rental property
with average use of less than 7 days is not an activity that a
taxpayer can include in computing the more than 750 hours of
services that a taxpayer needs to qualify as a real estate
professional under section 469(c)(7)(B)(ii).
The rationale for segregating petitioner’s hours is
consistent with the disparate reporting of the activities. The
Inn activity is reported on Schedule C because managing a
property with a short rental period is akin to running a
business. The other rental real estate activities are reported
on Schedule E as a separate and distinct activity and generally
fall within the purview of section 212.
The statute’s legislative history reinforces this rationale,
though not as petitioner suggests. A 1986 Senate Finance
Committee report, in explaining the then-new passive activity
loss rules, provided the following clarification: “A passive
activity is defined under the bill to include any rental
activity, whether or not the taxpayer materially participates.
However, operating a hotel or similar transient lodging, for
example, where substantial services are provided, is not a rental
activity.” S. Rept. 99-313, at 720 (1986), 1986-3 C.B. (Vol. 3)
1, 720.
 

#20
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Excellent, thank you Noobie. So, for example, if I own a property that I do not normally hold out for rent out at all, but I rent it [for fair rent] one time in January for 6 days, one time in June for 6 days, and one time in October for 4 days [16 days total] – and I have never rented that property before the current tax year, and I never rent it again after the current tax year, I am engaged in a trade or business in the current tax year. Period. And this is because of the number of days I rented it each time was less than 7…and that is the sole determining factor, is that right?

In other words, what you – and many others – are saying is that the normal test about whether we have a business or not (i.e. engaged on a regular and continuous basis) is completely inapplicable to every situation involving a rental period of less than seven days.

I would also point out that all these references to Sec 469 are applicable to 469 only. As noted in Post #5, Sec 469 applies to activities, whether or not they are trades or businesses, hobbies aside. For that reason, I strongly suggest that we remove ourselves from Sec 469 in making a trade or business determination.
 

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