AIR Bnb and QBI

Technical topics regarding tax preparation.
#1
Andrew  
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My client rents out a studio on his property. It's all short term rentals mostly, through AirnBnB. Client did spent time on remodelling the place so probably meets safe harbor hours. However, my software doesn't allow a QBI deduction if you select "short term/vacation rental". You can't take QBI on a short term rental?
 

#2
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What software do you use? Mine allows it. In mine you have to check a box as to whether the rental qualifies as a qualified business or not. Your software should have a similar box.
 

#3
Keyad22  
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Vacation or other short-term rentals are usually not considered a trade or business. Therefore, any activity coded as such will not be included in the Section 199A calculations for the Qualified Business Income Deduction (QBID). If you want the activity to qualify as a trade or business for QBID purposes, you must change the Type code on Screen Rent.

From CS PROFESSIONAL SUITE support.
 

#4
Andrew  
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Keyad22 wrote:Vacation or other short-term rentals are usually not considered a trade or business.


But is the software correct in it's assumptions? Are there any regs on which this is based? I may have overlooked it but can't find any reg or rule that precludes short-term rentals from QBI.
 

#5
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Actually, I am looking for the regs or rule as well.

I assume Thomas Reuters will not make such a big mistake. So I am looking for any publication, Rev. Proc. toward that direction. Are there any lease arrangements that will be excluded from section 199A deduction?
 

#6
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Normal T/B rules apply.

If the individual spends substantial time interfacing with renters, turning over and maintaining the unit, and treats it like a business, I have no problem calling it a T/B and therefore coding it as QBI.

Somebody who rents out a room in their house for 30 days during the year, doesn't have a P&L. Probably not. But, it probably doesn't matter in that situation because of the gross income limitation under 280A.
 

#7
Keyad22  
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To provide preliminary guidance to this popular question, the IRS released Notice 2019-07, the key points of which we've summarized below.

Exclusions
Income from these types of rentals is specifically excluded for the purposes of the QBI deduction:

Passive rental activities that are not considered a trade or business
For example, a single-family dwelling rented out for a year or more in which there is little or no interaction between the landlord and the tenants other than periodically collecting rent and the occasional repair
Property used as a residence by the taxpayer for any part of the year under IRC § 280A
This includes vacation homes, cabins, seasonal or "snowbird" residences, etc.
Triple-Net (NNN) leases, where the tenant or lessee pays real estate taxes, insurance, and maintenance in addition to rent and utilities
Rentals located outside the United States
Land rentals

From Turbo-tax
 

#8
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Keyad22 wrote:Are there any lease arrangements that will be excluded from section 199A deduction?


Would be hard to justify a triple net under Sec 162 and 199A.
 

#9
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Agree with ManVsTax. Use normal T/B rules. If the short term rental qualifies as a business and, therefore QBI, you will have to code your software correctly in order to calculate QBI properly.
 

#10
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Thank you all. Studio is only used for short term rentals, never for personal use, and used year-round. Some remodel costs, client has to stock up supplies and clean up after renter leaves, and there's a separate P&L: QBI it is.
 

#11
mariaku  
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Given that the AirBnB agreement requires you to provide "extraordinary services" - do you clean the room, change & wash bedsheets & towels, provide supplies, it should be on Sch C, subject to SE tax and eligible for QBI.
 

#12
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Substaintial services = QBI/Schedudle C, passive = Schedule E
Last edited by warnickcpa on 14-Oct-2021 3:34pm, edited 1 time in total.
 

#13
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Cleaning sheets...turning a unit over between tenants...those are not substantial services.

*Most* airbnbs belong on Sch E, not Sch C.

NOT subject to SE tax. This topic has been beat up and explored thoroughly at least once on this forum.
 

#14
JAD  
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My recollection is that if average rental period is 7 days or less, the property is not a "rental" but a t/b that belongs on Sch C. Passive vs nonpassive is determined under general rules, (ie, 500 hours) not rules specific to rental activities (ie, real estate professional). I don't know why short-term rentals such as this wouldn't be a t/b for 199A.

If this is a rental....

Gary McBride (well regarded former speaker with the Cal Soc CPAs) wrote a couple of articles about the treatment of rentals as trade/business as it relates to NIIT. When 199A arrived, he said that those articles were applicable. The articles cite a lot of important case law and make the case that except for triple net leases, most rentals meet the threshold to be treated as a trade/business. I linked to those articles on other threads, I will see if I can find one.

Either way, it seems to me that this is a t/b for 199A.
 

#15
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Sec 469 and Sec 1402 are two different code sections. Neither references the other...
 

#16
JAD  
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MvT, really? I know they are two different code sections. Sheesh.

As stated, my recollection is that if average use is 7 days or less, property is not a rental for 469 and belongs on Sch C. It is a t/b. Discussion above touches on whether reporting should be on C or E. I believe the conclusions depends upon # of days of average use.

OP asks about 199A, which I have attempted to respond to. If average use is 7 days or less, then why wouldn't it be a t/b for 199A? If the activity really is a rental, then look to case law.

The articles used to be here:

http://www.mntaxclass.com/files/RRETOB_Part_II.pdf

http://www.mntaxclass.com/files/RRETOB_Part_I.pdf

but these links are not working for me. Perhaps OP can find them, if desired, but a quick Google search was not successful for me. There are two articles, both titled Rental Real Estate Trade or Business - The NIIT and Beyond. The other is the same, Part II.
 

#17
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JAD wrote:MvT, really? I know they are two different code sections. Sheesh.


I apologize if that was rude. I didn't intend it that way. If that was the way it was received, I apologize. I've always valued your input. I've decided to support a local business today by purchasing and consuming Sweetwater 420 pale ale. Perhaps today wasn't the best day to support local businesses. :)

What I was getting at...is that under 469, rental real estate with an average period of customer use of 7 days or less isn't considered rental real estate for 469 purposes. I.E. The RE pro rules don't apply and the up to $25k PAL allowance does not apply. Most Airbnbs fit this fact pattern. Therefore, most Airbnbs will be nonpassive if the owner materially participates (no need to qualify as RE pro). So we just look to those tests under the temp reg.

And then, under 1402 and related case law, we test if the lessor provides substantial services, such as room service, cleaning room during the stay (and not between lessees), shuttle services, laundry, breakfast, etc. Most Airbnbs will fail this test.

Therefore, nonpassive, not subject to SE tax is the common fact pattern with Airbnbs. Schedule E, coded as nonpassive in tax software...

That's what I was getting at...
 

#18
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And then, the 162 tests are completely different. Those are primarily based on substantiality of effort. Throwing more mud in the waters here...
 

#19
JAD  
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I've decided to support a local business today by purchasing and consuming Sweetwater 420 pale ale.


LOL, I get it.

162/defn of trade business/199A. I think 199A applies.

I agree with your analysis of where you conclude not a rental activity for purposes of the passive rules and not subject to SE. My instinct would have been to include it on Sch C and check the box in Lacerte to say that this is not subject to SE tax. My way is more likely than yours to cause notices to be generated, so absolutely the optics on Sch E are better. Perhaps form instructions provides specific guidance for this sort of thing. It is a theoretical exercise at this point - I am not going to check, but OP might want to.
 

#20
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Throwing more mud in the waters here...


Then there is always T.D.8175 p3
The rationale for the “seven-day rule” is that a customer's use of property for seven days or less generally will
require the person furnishing the property to provide services significant enough to justify the conclusion
that the person is engaged in a service business rather than a rental activity.
 

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