Real estate professional AIRBNB

Technical topics regarding tax preparation.
#1
Posts:
212
Joined:
2-Mar-2015 6:13pm
Location:
CALIFORNIA (CA)
I have a client who has 4 properties that he manages on AirBNB. He only works on the rental properties no other income for him. Spouse has a W2 job. He claims to be spending more than 750 hours on all the properties during the year and is actively involved with managing the rental property as he does them through AirBNB. Can he be considered a Real Estate Professional?
 

#2
KoiCPA  
Posts:
729
Joined:
8-May-2023 1:30pm
Location:
Washington
It sounds like he meets the requirements. Emphasize that contemporaneous documentation of hours is key if there's an audit.

750 hours on four properties seems a little high, so I'd ask some questions to see if it makes sense. Maybe he can show you his time log, or walk you through a week in the life of an RE pro.
 

#3
Posts:
2771
Joined:
22-Apr-2014 1:34pm
Location:
North Carolina
Is the average rental period 7 days or less (most AirBNB's are)? If so, and taxpayer materially participates in each one (which could be spending at least 100 hours and more hours than any one else), I would not try to meet the real estate professional test. If you go the RE professional route, sounds like you are going to have to make the aggregation election, which I try to stay away from if possible.
 

#4
Posts:
2887
Joined:
21-May-2018 7:50am
Location:
Northern MI and Coastal SC
I just went through this with a client and we both concluded it was not worth aggregating. While he absolutely exceeds 750 hours on two properties (he handles all repairs, inspections, guest bookings, cutting of firewood, vendors, etc.), there were too many other downsides to it on top of the fact he has a six figure W2 job, which varies in hours from 5 per week to 50+.
 

#5
KoiCPA  
Posts:
729
Joined:
8-May-2023 1:30pm
Location:
Washington
CornerstoneCPA, don't forget that it's not just 750 hours on real estate, it's also showing that you spend more time on it than any other job. It's not impossible for someone with a W2 to qualify, but if he averages even 20 hrs/week on the other job, he won't have more than half in real estate.
 

#6
JAD  
Posts:
4022
Joined:
21-Apr-2014 8:58am
Location:
California
I'm pretty sure that if the average rental period is 7 days or less, then it's not a rental. The real estate professional issue is n/a and the election to aggregate is not available. The test is the regular material participation reg - 500 hours, etc. Agree? Disagree?
 

#7
Posts:
2771
Joined:
22-Apr-2014 1:34pm
Location:
North Carolina
JAD wrote:I'm pretty sure that if the average rental period is 7 days or less, then it's not a rental. The real estate professional issue is n/a and the election to aggregate is not available. The test is the regular material participation reg - 500 hours, etc. Agree? Disagree?


That's what I was getting at in my post above. Agree!
 

#8
Posts:
8151
Joined:
4-Mar-2018 9:03pm
Location:
The Office
I have found the 100 hours test with more hours than any other individual is the easiest for clients to meet. Temp Reg Sec. 1.469-5T(a)(3).

Of course, contemporaneous records are paramount and this hurdle requires clients to either track or accurately estimate hours of non-owners such as cleaners and landscapers.
 

#9
Posts:
212
Joined:
2-Mar-2015 6:13pm
Location:
CALIFORNIA (CA)
My client is only involved with managing the property through AirBNB. He has no other income and the spouse has a W2. He claims to be spending more than 750 hours in aggregate on the 4 properties that he owns.
 

#10
Posts:
155
Joined:
4-Jun-2023 7:35am
Location:
WA
CornerstoneCPA wrote:I just went through this with a client and we both concluded it was not worth aggregating. While he absolutely exceeds 750 hours on two properties (he handles all repairs, inspections, guest bookings, cutting of firewood, vendors, etc.), there were too many other downsides to it on top of the fact he has a six figure W2 job, which varies in hours from 5 per week to 50+.


You may need to aggregate to get the material participation, but I don't think TP needs to "formally" elect to aggregate activities to get the 750 hours.

QuickFinder has a little write up on this... Also I think statute can be read to say you're just looking at all TP's real property trades or businesses to see if total exceeds 750 hours:
ii)such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.
Last edited by StephenLNelson on 4-Jun-2023 9:42am, edited 1 time in total.
 

#11
Posts:
155
Joined:
4-Jun-2023 7:35am
Location:
WA
Seaside CPA wrote:Is the average rental period 7 days or less (most AirBNB's are)? If so, and taxpayer materially participates in each one (which could be spending at least 100 hours and more hours than any one else), I would not try to meet the real estate professional test. If you go the RE professional route, sounds like you are going to have to make the aggregation election, which I try to stay away from if possible.


OK, I think if it's a STR situation--so average rental interval of 7 days or less--it's by definition NOT rental of tangible property. That means you just need to meet one of the material participation rules like the one you mention.

But I think you might need or want to group your STR properties to do that. Grouping AirBNBs would surely be acceptable.
 

#12
Posts:
6036
Joined:
22-Apr-2014 3:06pm
Location:
WA State
StephenLNelson wrote:
Seaside CPA wrote:Is the average rental period 7 days or less (most AirBNB's are)? If so, and taxpayer materially participates in each one (which could be spending at least 100 hours and more hours than any one else), I would not try to meet the real estate professional test. If you go the RE professional route, sounds like you are going to have to make the aggregation election, which I try to stay away from if possible.


OK, I think if it's a STR situation--so average rental interval of 7 days or less--it's by definition NOT rental of tangible property real estate. That means you just need to meet one of the material participation rules like the one you mention.

But I think you might need or want to group your STR properties to do that. Grouping AirBNBs would surely be acceptable.


Agreed with above that reaching material participation is probably easier than you might think, but the problem with the STR situation is that activities spent on STRs aren't considered in qualifying for RE professional status.
~Captcook
 

#13
Posts:
155
Joined:
4-Jun-2023 7:35am
Location:
WA
CaptCook wrote:
Agreed with above that reaching material participation is probably easier than you might think, but the problem with the STR situation is that activities spent on STRs aren't considered in qualifying for RE professional status.


I wonder if we even disagree here or are just pointing to different issues...

BTW, sidebar: I think we may know each other. And I know we've been in forums together and had good discussions before. (I've often used the alias, "SeattleCPA.")

But here's what I think:

Say a high income taxpayer without some other "job" owns 6 AirBnBs and spends 125126 hours on each. So 756 hours in total.

If the average rental interval is 8 days, I think these AirBnbs are a rental activities... real estate rental activities.. so in this case, TP probably qualifies as a real estate professional. And if the 126 hours per rental is enough to meet material participation for each property--say because those hours all count and nobody has more participation--TP gets to deduct any passive losses. (TP does not need to group activities for REPS.)

If the average rental interval is 7 days, I think these AirBnBs are not rental activities... so also not real estate rental activities either... so in this case, TP just needs to meet material participation threshold to take passive losses.

If three rentals show interval of 7 days and three show interval of 8 days, and I kinda think this is scenario you're pointing to, things get problematic. First, the "8 days" AirBnBs are real estate rental activities. And with only 378 "real estate" hours the TP doesn't qualify for real estate professional status. Even if she or he materially participates. And then the "7 days" AirBnBs... well those aren't real estate rentals... But is 378 hours enough to give TP material participation? If not, no passive losses deductible for them either.

Sound okay?
 

#14
KoiCPA  
Posts:
729
Joined:
8-May-2023 1:30pm
Location:
Washington
I don't think the period of rental matters for RE professional. A "real estate trade" includes things that are not rental, such as real estate agents and home builders. I've never seen an argument that short term rentals are not real estate.

To quote Sec 469:
(C)Real property trade or business
For purposes of this paragraph, the term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.
 

#15
Posts:
155
Joined:
4-Jun-2023 7:35am
Location:
WA
See 1040 QuickFinder page 8-9 if you have it. Nice little write-up.

But I think the issue is you can't group a rental and non-rental activity (except for self-rentals) and the regs say average rental interval of 7 days or less is not a rental activity activity.

https://www.law.cornell.edu/cfr/text/26/1.469-1T

Specifically 1.469-1T(e)(3) and its description of when some activity is not a rental activity.

The Passive Loss Limitation ATG describes this on page 2-3. (I know that reference is old and out of date but on this matter I think it's still correct.)
 

#16
JAD  
Posts:
4022
Joined:
21-Apr-2014 8:58am
Location:
California
KoiCPA wrote:I don't think the period of rental matters for RE professional. A "real estate trade" includes things that are not rental, such as real estate agents and home builders. I've never seen an argument that short term rentals are not real estate.

To quote Sec 469:
(C)Real property trade or business
For purposes of this paragraph, the term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.


I agree re defining him as a real estate professional. But the benefit of being a real estate professional is that rental activities are not automatically passive. But these are not rental activities. They are trade/business activities. His status as passive or not passive with regard to each activity or to the whole (if properly grouped as one activity) is determined under the normal material participation rules regardless of his status as a real estate professional. The real estate professional issue is n/a.
 

#17
Posts:
6036
Joined:
22-Apr-2014 3:06pm
Location:
WA State
KoiCPA wrote:I've never seen an argument that short term rentals are not real estate.


JAD wrote:But these are not rental activities. They are trade/business activities.


I agree with JAD here (and Stephen above). At a rental period of <7 days, these align with hotel activities rather than rental real estate. That's why the hours won't count toward the RE Professional test.
~Captcook
 

#18
Posts:
5698
Joined:
21-Apr-2014 7:21am
Location:
The Land
Sounds like JAD and Capt aren’t on the same page. JAD says she agrees with Nelson as to “defining him as a real estate professional.”

Capt say he agrees with JAD, but then Capt says:

At a rental period of <7 days, these align with hotel activities rather than rental real estate. That's why the hours won't count toward the RE Professional test.


I’m pretty confident Stephen and JAD have it right. And in this particular case, of a guy who only holds rentals that rent for 7-days or less on average, the RE Pro thingy is moot (as JAD says). But that conclusion doesn’t mean those hours don’t count for determining RE Pro status. After all, operating short-term AirBNB’s is a real estate trade or business (although not a rental activity; note that being a realtor isn’t a rental activity either). This can have a lot of relevance for Joe Blow who is relying on hours from “7-days or less rentals” to meet the quantitative RE Pro tests, when Joe Blow owns other “rentals” that are not “7-days or less” rentals.
 

#19
Posts:
155
Joined:
4-Jun-2023 7:35am
Location:
WA
Jeff-Ohio wrote:Sounds like JAD and Capt aren’t on the same page. JAD says she agrees with Nelson as to “defining him as a real estate professional.”

Capt say he agrees with JAD, but then Capt says:

At a rental period of <7 days, these align with hotel activities rather than rental real estate. That's why the hours won't count toward the RE Professional test.


I’m pretty confident Stephen and JAD have it right. And in this particular case, of a guy who only holds rentals that rent for 7-days or less on average, the RE Pro thingy is moot (as JAD says). But that conclusion doesn’t mean those hours don’t count for determining RE Pro status. After all, operating short-term AirBNB’s is a real estate trade or business (although not a rental activity; note that being a realtor isn’t a rental activity either). This can have a lot of relevance for Joe Blow who is relying on hours from “7-days or less rentals” to meet the quantitative RE Pro tests, when Joe Blow owns other “rentals” that are not “7-days or less” rentals.


So I can see how some practitioners reach a different conclusion. But here's the sequence of my logic:

1. Sec 469(c)(7)(C) says a real estate professional is someone who spends more than 750 hours and more than half their time in any real estate trade or business blah blah blah and then includes "rental" in the list of real-estate-y trades or businesses. We obviously want to pay attention to words like "any."

2. Question is, what's a "rental." E.g., is a school with dormitories housing students a rental? A hospital with patients? A nursing home? A hotel? Treasury is smart of course. So they predictably try to draw a line in the sand so we know which activities are and are not rentals.

3. The regs, specifically https://www.law.cornell.edu/cfr/text/26/1.469-1T(e) provides some definitions as to where the line in sand is and one of those definitions says that seven days or less STRs are not rentals.

I conclude then that STR hours don't work toward the REPS hours or percent.

But I can see that someone might reasonably read reg to only say it means you just look at material participation to determine passivity for STRs with average rental interval or 7 days or less. But that that doesn't mean the hours don't work for REPS. "Any" means any?
 

#20
Posts:
2771
Joined:
22-Apr-2014 1:34pm
Location:
North Carolina
 

Next

Return to Taxation



Who is online

Users browsing this forum: Anderly, beardenjv, CoastalCPA, Google [Bot], HowardS, ImposterTax712, JoJoCPA, lckent, MAPCPA60, MilesR, missingdonut, Terry Oraha, UnlicensedTaxPro and 144 guests