Super complicated return trying to get done at the last minute. Taxpayer did a 1031 exchange of a very low basis Single Family rental in 2021 (adjusted basis was ~$100k). They bought up so that the adjusted basis of the new property (including the C/O basis) is ~$1M. New property is a massive farm property (~150 acres of land) with a home, pool house, and pool and accommodate ~20 guests. Closed mid 2021. Tax assessment is ~67% land, 33% improvements.
In 2021, total rental income was not a ton ~$10k with about 75% of that coming from 3 separate rentals of the home/property of ~3 days. The other 25% came from farm rental income which is on an annual rental payment and they reimbursed the seller for the relevant portion.
In 2021, the taxpayer (H&W) spent a ton of time updating the property and decorating it engaging a property manager for 2022, doing improvements, etc. They definitely meet material participation. They have a big loss a lot of which is due to ~$75k of de-minimis decor, furniture, fixtures, appliances, etc.
I wondered whether this can be considered a short term rental and did some research. IRS Pub 925 states, the following. I've bolded the part that makes me think perhaps I need to figure out days rented by each category using the ratio and if I use 6 months for the land rental, we're well over 7 days as a whole. Does this make sense and thus I can't separate the activity into two, one in which material participation occurs and the other in which it doesn't?
"Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional...
Exceptions. Your activity isn’t a rental activity if any of the following apply.
1. The average period of customer use of the property is 7 days or less. You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. The activity's average period of customer use will equal the sum of the amounts for each class.