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Airbnb / Short-term Rental

PostPosted: 7-Feb-2016 6:23pm
by EZTAX
We have already had several clients come in with 1099’s from Airbnb so I want to make sure I am understanding the rules correctly.

I apologize in advance if we have already gone over this but a search did not turn up much helpful information.

Many factors affect how to properly report Airbnb/Short-term rental income including if the total number of rental days is less than 15 and if the home is used personally or only rented.

For this discussion I want to focus on a home being used as a primary residence with two rooms rented out exclusively and no personal use of the rental space. The rooms were rented for more than 14 days each. No extra-ordinary services were provided. Let’s say 1000 sq. ft total and 200 sq. ft rented.

If we add up the total days rented and divide by the number of tenants we get the average number of days rented per tenant. If this number is 7 days or less then the income and expenses must be reported on a schedule C. SE tax is due if there is a profit. If there is a loss then we must look at the material participation rules - the active participation standard and the $25,000 allowance do not apply as they would with a typical rental property.

Is this a correct interpretation of the law?

I appreciate any thoughts on this.

I found this IRS audit guide helpful:
https://www.irs.gov/Businesses/Small-Bu ... tal-Losses

Re: Airbnb / Short-term Rental

PostPosted: 8-Feb-2016 5:01pm
by WEISSEA
"If this number is 7 days or less then the income and expenses must be reported on a schedule C. SE tax is due if there is a profit. " Is this a correct interpretation of the law?

No. IRC 469 is where you find the 7 day rule, and IRC 1402 is where you find self employment income. To be Schedule C significant services must be rendered. To avoid Schedule C, any services thart are offered must be no more than would be provided for regular rental real estate(utilites,trash,gardner, plumbing repairs etc). If no special services are provided(e.g. maid service, continental breakfast, possibly a gym etc) then Schedule E and no SE tax. In the case of offering amenities, remember no good deed goes unpunished.

Re: Airbnb / Short-term Rental

PostPosted: 8-Feb-2016 5:56pm
by EZTAX
I used to understand this as you are suggesting but a recent CPE seminar said otherwise. When I look in Temp section 469 as you suggested both the 7 day rule and the significant services are mentioned.

In the audit manual I linked above it says: "Under Reg. § 1.469-1T(e)(3)(ii), six types of activities normally defined as rentals, are treated as non-rental activities, i.e. as businesses". This is consistent with information provided in the seminar and led me to believe that they should be reported on schedule C with SE tax.

Thanks for your thoughts, I will continue to look into this.

Re: Airbnb / Short-term Rental

PostPosted: 8-Feb-2016 6:15pm
by Harry Boscoe
The audit manual and the recent seminar material that you sourced should have both clarified that **for the passive activity loss limitation rules of IRC section 469**, residential rentals that average seven or fewer days per tenant aren't to be considered *rentals* in the "per se passive activity* rule found in section 469.
The rental of real estate for section 1402 - the SE tax rules - is a totally unrelated definition.
Sadly, the two concepts are quite similar, but their definitions are quite different. Gamma taught me all about them... ;)

Re: Airbnb / Short-term Rental

PostPosted: 8-Feb-2016 6:28pm
by EZTAX
Thanks WEISSEA, I think I am getting it.

Section 1402 says "there shall be excluded rentals from real estate and from personal property leased with the real estate .... together with the deductions attributable thereto, unless such rentals are received in the course of a trade or business as a real estate dealer".

So under 7 days we have to worry about taking a loss due to higher bar set by material participation rules but it is still reported on schedule E. If significant services then it is treated more like a B and B and therefore goes on a schedule C.

That sort of makes sense....

Re: Airbnb / Short-term Rental

PostPosted: 8-Feb-2016 6:53pm
by EZTAX
Thanks Harry, wish you were local so I could spring for the PBR and you could help me get my head around it better or at least not care so much that I can't!

Re: Airbnb / Short-term Rental

PostPosted: 8-Feb-2016 6:57pm
by EZTAX
I might have misunderstood the seminar material. I will have to go back and look it up again. Thanks to you both.

Re: Airbnb / Short-term Rental

PostPosted: 8-Feb-2016 8:24pm
by Jeff-Ohio
EZTAX wrote:So under 7 days we have to worry about taking a loss due to higher bar set by material participation rules but it is still reported on schedule E.


Consider this Mat Par Test:

The individual's participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year;

Re: Airbnb / Short-term Rental

PostPosted: 8-Feb-2016 8:33pm
by DaveFogel
I just want to clear up a few points in this discussion.

First, the “7-day rule” is found in Temp. Reg. §1.469-1T(e)(3)(ii)(A). It states that an activity is not a rental activity if the average period of customer use of the property is 7 days or less. For purposes of this rule, there is no requirement that the taxpayer also must provide “significant services.” However, there’s another exception involving “significant services.” Temp Reg. §1.469-1T(e)(3)(ii)(B) states that an activity is not a rental activity if the average period of customer use of the property is 30 days or less and “significant personal services” are provided. As EZTAX states in post #3, there are 6 activities described in this regulation that are not treated as rental activities.

Second, if any of the activities described in Temp. Reg. §1.469-1T(e)(3)(ii) (of which the 7-day rule is one) exist, then the activity is not treated as a rental activity for purpose of the per se rental rule of IRC §469(c)(2), as Harry states in post #4. So, if it’s not treated as a rental activity, then it shouldn’t be reported on Schedule E. Rather, it should be reported on Schedule C. This doesn’t necessarily mean that the activity is non-passive. To be non-passive, the taxpayer would have to satisfy one of the 7 material participation tests of Temp. Reg. §1.469-5T(a).

Third, just because a rental activity is deemed not to be a rental activity for purposes of the passive loss rules doesn’t necessarily mean that a profit from such activity is subject to self-employment tax. The exclusion of rentals from real estate (IRC §1402(a)(1)) from self-employment earnings would still apply. Harry’s post #4 on this point is correct.

Re: Airbnb / Short-term Rental

PostPosted: 8-Feb-2016 8:33pm
by EZTAX
Thanks Jeff, understood but I appreciate the reminder.

Re: Airbnb / Short-term Rental

PostPosted: 8-Feb-2016 9:07pm
by EZTAX
Thanks for checking in Dave, your feedback and understanding is always greatly appreciated!

So 7 day or less ave. rental does go on a schedule C but no SE tax is due. Why would they do that other than to confuse the situation????

Re: Airbnb / Short-term Rental

PostPosted: 8-Feb-2016 10:10pm
by Jeff-Ohio
EZTAX wrote: Why would they do that other than to confuse the situation????

I wouldn’t do it, I’d put it on Schedule E. As you say, you’re just inviting a tax notice if the thing is profitable. And I can’t say if the form instructions actually tell you to do that anyway.

Re: Airbnb / Short-term Rental

PostPosted: 9-Feb-2016 7:23pm
by taxea
It is the issuer of the 1099 that files the Sch C....if they manage the rental and services. The TP who is the owner files Sch E showing the 1099 income and any expenses taken from the income to pay for services.

Re: Airbnb / Short-term Rental

PostPosted: 9-Feb-2016 8:30pm
by WEISSEA
"I wouldn’t do it, I’d put it on Schedule E."

Agree. Pub 334: If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc., who provides services (maid services, etc.) for guests, report the rental income and expenses on Schedule C or C-EZ. If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E.

Re: Airbnb / Short-term Rental

PostPosted: 26-Jan-2023 9:19pm
by DillinghamPLLC
I came across this post and wanted to share my ideas regarding 1.469 and 1.1402 in their relation to this topic.

first looking at 1.469...

§ 1.469-1T General rules (temporary).
(e) Definition of “passive activity” -
(3) Rental activity -
(i) In general. Except as otherwise provided in this paragraph (e)(3), an activity is a rental activity for a taxable year if -
(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 -
(A) The average period of customer use for such property is seven days or less;


You can see if you look at the entirety of this rule that this is a general rule definition of rental activity - *Not* a description of Passive Loss Rules. This means that this is excluded from the general definition of rental activity, thereby excluded form the general definition of passive activity - thereby having absolutely nothing to do with rules attributable to passive activities or anything described in any other section as a rental activity.

Passive Activity Loss rules are covered later, in § 1.469.2T

§ 1.469-2T Passive activity loss (temporary).
(a) Scope of this section. This section contains rules for determining the amount of the taxpayer's passive activity loss for the taxable year for purposes of section 469 and the regulations thereunder.


There is absolutely nothing in the code that contradicts the "less than 7 day" rule - because it is outside the scope of anything discussed as a "rental activity". Unfortunately, there is just nothing elaborating on it anywhere else in the code.

Using these parameters - I would argue that the discussion of SE tax in 1.402 related to rental activity is complete irrelevant - as we have already established that we do not fall under the scope of rental activity.

All of this leads to the conclusion that activity that falls under the 7 day exclusion rule is reportable under schedule C and subject to SE tax.

Re: Airbnb / Short-term Rental

PostPosted: 27-Jan-2023 3:31pm
by TAXMASTER
I would argue that the discussion of SE tax in 1.402 related to rental activity is complete irrelevant All of this leads to the conclusion that activity that falls under the 7 day exclusion rule is reportable under schedule C and subject to SE tax.


IRS 469 and Reg 1.1402 are separate and distinct so 7 days rule nothing to do with SE tax.

2022 Schedule C instructions: Other Schedules and Forms You May Have To File

• Schedule E (Form 1040) to report rental real estate and royalty income or (loss) that is not subject to self-employment tax.

Re: Airbnb / Short-term Rental

PostPosted: 27-Jan-2023 5:50pm
by 808CPA808

Re: Airbnb / Short-term Rental

PostPosted: 27-Jan-2023 8:00pm
by CaptCook
That seems like a pretty solid resource
Thanks for sharing

Re: Airbnb / Short-term Rental

PostPosted: 1-Feb-2023 3:16am
by TaxItRight
808CPA808 wrote:https://www.hrblock.com/tax-center/wp-content/uploads/2018/05/airbnb-taxes.pdf


Sounds like 'substantial services' is the primary factor to determine whether it goes on to Schedule E or Schedule C.

All the other factors, such as the 7 days rule, the 30 days rule, number of hours spent on the activity, etc, are to determine whether it is a passive or non-passive activity but still reported on a Schedule E.

Did I read everything correctly?

Re: Airbnb / Short-term Rental

PostPosted: 1-Feb-2023 11:32am
by TAXMASTER
Did I read everything correctly?


Correct.