Airbnb - Active or Passive - Deductibility of Losses Schedule C
Investor · Scottsdale, AZ · Member since 2016 · 86 posts · 61 votes
Airbnb - Active or Passive - Deductibility of Losses Schedule C
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Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
6y(1) The IRS has taken no such position. You're welcome to provide a link that reinforces your statement.
(2) I'm much less concerned about what position the IRS takes than what position my clients can support under authoritative guidance. IRC Sec 1402 and the related Treasury regs govern income subject to SE taxes.
(3) No such thing as "active" income in the context of IRC Sec 1402 and 469.
Again, most Airbnb and VRBO belong on Sch E and are not subject to SE taxes. Consult your tax advisor.
30 Replies
- Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes6y
You should work with your tax pro to determine the proper treatment. AirBnB, VRBO, etc have unique tax treatment under the passive activity loss rules and general depreciation system. Most AirBnBs would not be reported on Schedule C...
Passive activities can be reported on Schedule C... Non-passive activities can be reported on Schedule E. Have you ever heard anyone say the tax code is complex?
- Investor · Scottsdale, AZ · Member since 2016 · 86 posts · 61 votes6y
@McElroy
I believe the IRS has taken the position that Airbnb income is active and is subject to self-employment tax. If that is the case, then the income gets reported on Schedule C. The IRS cannot have it both ways. If the Airbnb is active and subject to generating self-employment tax, then the IRS must also be your partner in the losses as well and it would seem that any net loss would also be reported on Schedule C and shelter other active income.
- Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes6y
(1) The IRS has taken no such position. You're welcome to provide a link that reinforces your statement.
(2) I'm much less concerned about what position the IRS takes than what position my clients can support under authoritative guidance. IRC Sec 1402 and the related Treasury regs govern income subject to SE taxes.
(3) No such thing as "active" income in the context of IRC Sec 1402 and 469.
Again, most Airbnb and VRBO belong on Sch E and are not subject to SE taxes. Consult your tax advisor.
- Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes6y
Originally posted by @Craig Lessler:
@McElroy
I believe the IRS has taken the position that Airbnb income is active and is subject to self-employment tax. If that is the case, then the income gets reported on Schedule C. The IRS cannot have it both ways. If the Airbnb is active and subject to generating self-employment tax, then the IRS must also be your partner in the losses as well and it would seem that any net loss would also be reported on Schedule C and shelter other active income.
This isn't correct- I'm not sure why you'd assume the CPA didn't know.
There are a few rules that come into play for short term rentals, including a time test, and a substantial services test.
An Air BNB COULD be active and subject to SE- however it really needs to be fully operating like a hotel, offering much more in terms of services than what most offer. I've yet to come across one that meets this test.
So generally, It is sch E and not SE taxed.
- 6yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
I am backing up my friends @Natalie Kolodij and @Eamonn McElroy.
Most likely reported under schedule E with no SE tax. The loss, if any, is not inherently passive vs inherently passive rental income loss and will offset your other income if you materially participate in the activity. This is the best of both worlds.
INVESTOR FRIENDLY CPA®5240 Reviews - 6yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
There is no 100% clarity on the tax treatment of short-term rentals, and accountants disagree on some issues.
Here is where we mostly have a consensus. With an exception of "substantial personal services", meaning hotel-style service, income from AirBnB is not subject to SE tax. Losses from AirBnB are considered nonpassive for the purposes of Passive loss limitations, as long as you can show "material participation." It usually means that you can deduct losses against your other income such as W2.
Where we start disagreeing is details of what qualifies for what and on the reporting. If your AirBnB shows income, and you report it on Sch C, there is no way to avoid the SE tax - so it seems to indicate that Sch E is the right one. However, you will need to make sure that your losses will escape the passive loss limitations, meaning you need to change the default behavior of Sch E.
Showing material participation can be a trap. People lost court cases when they tried to deduct short-term rental losses while being totally hands-off.
- Member since 2021 · 5 posts · 0 votes5y
Question: What is the interplay between "best of both worlds" situation above (abnb short term rentals not being rental activity, non-passive and able to offset W2 income if materially participate), and the 14 day/10% personal use test? If you exceed that limit, can you still play this game, subject only to having to allocate your expenses by ratio of abnb days to total occupancy days?
Martin
- Member since 2021 · 5 posts · 0 votes5y
@Ashish Acharya, if personal use as well as abnb income, would that non-passive abnb loss be subject to the $25,000 and magi test for losses, or unlimited? thanks in advance for considering this.
- Rental Property Investor · Sarasota, FL · Member since 2018 · 46 posts · 76 votes5y
@Michael Plaks
Hi Michael,
How about if your spouse is a real estate professional?
I have a W2 job in a high tax bracket, but we are planning on owning Airbnb’s that my wife actively manages along with her working as a real estate agent...
Our goal was to have her materially involved so that we could write off potential losses against my W2 income.
*We have not purchased any properties yet and will consult with my accountant, I’m just curious for overall strategy purposes.*
- 5yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Originally posted by @Martin Nussbaum:
@Ashish Acharya, if personal use as well as abnb income, would that non-passive abnb loss be subject to the $25,000 and magi test for losses, or unlimited? thanks in advance for considering this.
Non passive income is not subject to 25k.
if you have personal use, then there will be vacation home rule. Other type of limitation.
Also, if you are expecting a huge loss from Airbnb, that is not going to happen. Most of the time, Airbnb usually has a net income.
INVESTOR FRIENDLY CPA®5240 Reviews - Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes5y
@Martin Nussbaum @Jason Collins
It is important that you work with tax professionals who understand the unique tax consequences and planning opportunities surrounding STRs.
If the average period of customer use is seven days or less (which would encompass nearly all AirBNBs, VRBOs, etc), the rental is not considered a rental activity under the passive activity loss rules.
What this means is that whether one is a real estate professional or not does not matter. One merely needs to materially participate in the STR activity. Furthermore, the up to $25k allowance would not apply here. The STR would be appropriately categorized as an "other passive activity", not a "rental real estate activity with active participation" as, again, a rental with an average period of customer use of seven days or less is not a rental activity under the passive activity loss rules.
- Member since 2021 · 5 posts · 0 votes5y
@Ashish Acharya thanks. the huge loss would come from depreciation, especially if i get a cost segregation analysis for the recently purchased property. so the personal use residence limitation supercedes everything else we were discussing, and you cant take advantage of excess losses or bonus dpereciation to offset w2 income if you have personal use? @Eamonn McElroy with all respect, your answer confuses me further. its either passive or not.If its not, its trade or business income. "Other passive" does not apply to short term vrbo, it would be business. I am seeing conflicting opinions from accountants and other tax professionals online as to whether this less than 7 day rule should be on schedule c or e, and which flow chart items come first in the analysis or second. Opinions are all over the place, even the tax court decision conflicts with irs pub 529, and the IRS rules are ambiguous in certain situationa. I am a tax attorney and i still am confused, and I am willing to bet that most people will be putting it on schedul e, not paying se tax, not calling it passive, and deducting losses against w2 income, and playing roulette with audits.
- Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes5y
Martin...you're a little lost. You're also misunderstanding and heavily conflating some basic tax concepts.
its either passive or not.
Yup.
If its not, its trade or business income.
You're conflating two different concepts here. The PAL rules deal with "activities" and the taxpayer's level of participation in said activities. A trade or business can be passive. A trade or business can also be non-passive. "Non-passive" is not synonymous with "trade or business".
"Other passive" does not apply to short term vrbo, it would be business.
You're not understanding what I'm conveying, and again you're conflating. Under 469, if an activity is passive, we generally have two different buckets. We have: (1) rental real estate activities with active participation that qualify for the up to $25k passive loss allowance and (2) all other passive activities. As rental real estate with an average period of customer use of 7 days or less is not considered a rental activity for 469, they fall into the latter category if the activity is passive.
I am seeing conflicting opinions from accountants and other tax professionals online as to whether this less than 7 day rule should be on schedule c or e, and which flow chart items come first in the analysis or second.
Again, you're conflating two different code sections and concepts. The average period of customer use under IRC Sec 469 has nothing to do with the determination of whether a rental goes on Sch C/Sch SE or Sch E. The authoritative guidance needed to make that determination is found under IRC Sec 1402. Usually what we look for are substantial, hotel-like services. Most run of the mill Airbnbs don't belong on Sch C/Sch SE, however one should always discuss with their tax advisor.
Opinions are all over the place
Ehh...not really. Not for those who have put in the research.
even the tax court decision conflicts with irs pub 529
Not sure what cases you're looking at, but an IRS pub is non-authoritative and should be taken with a grain of salt.
the IRS rules are ambiguous in certain situationa
Which is why taxpayers are willing to pay tax advisors.
- Member since 2021 · 5 posts · 0 votes5y
@Eamonn McElroy you state "As rental real estate with an average period of customer use of 7 days or less is not considered a rental activity for 469, they fall into the latter category if the activity is passive." Fine, and if the vrbo activity is not passive, and has active "material participation", are there any limits to excess losses? is your answer the same for those whose personal use is less than or greater than the 14 day/10% test for rental days? I assume one still has to allocate the expenses including depreciation between the personal and guest days.
- 5yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
Wow, well this thread has been confusing. I’ve been reporting mine as passive schedule E for the last 6 years.
- Member since 2021 · 5 posts · 0 votes5y
@John Morgan right? one would almost suspect intentionally so, to encourage business, lol. Perhaps its my fault for not simplifying the hypotheticals, and you tell me John if you fall into one of these.
1. John has a vacation home, uses vrbo or abnb, average guest occupancy seven days or less, and John materially participates in managing the property. John rents out the property for 40 days in 2020, and uses it personally 20 days. Can John deduct excess losses, ie depreciation, against his w2 income from a salaried position? Can he deduct the mortgage interest that is unallocated to the rental period, on his schedule A?
2. Same facts, except that John only has 3 days of personal use in the year. Can John deduct excess losses, ie depreciation, against his w2 income from a salaried position? Can John deduct the mortgage interest that is unallocated to the rental period, on his schedule A?
Now lets see if the experts post simple answers to these.
- Member since 2020 · 5 posts · 5 votes5y
@Martin Nussbaum, Also Interesting in hearing opinions on this.
Looking forward to someone answering this. We are looking at similar scenario
@John Morgan right? one would almost suspect intentionally so, to encourage business, lol. Perhaps its my fault for not simplifying the hypotheticals, and you tell me John if you fall into one of these.
1. John has a vacation home, uses vrbo or abnb, average guest occupancy seven days or less, and John materially participates in managing the property. John rents out the property for 40 days in 2020, and uses it personally 20 days. Can John deduct excess losses, ie depreciation, against his w2 income from a salaried position? Can he deduct the mortgage interest that is unallocated to the rental period, on his schedule A?
2. Same facts, except that John only has 3 days of personal use in the year. Can John deduct excess losses, ie depreciation, against his w2 income from a salaried position? Can John deduct the mortgage interest that is unallocated to the rental period, on his schedule A?
Now lets see if the experts post simple answers to these.
Quote from @Martin Nussbaum:
@John Morgan right? one would almost suspect intentionally so, to encourage business, lol. Perhaps its my fault for not simplifying the hypotheticals, and you tell me John if you fall into one of these.
1. John has a vacation home, uses vrbo or abnb, average guest occupancy seven days or less, and John materially participates in managing the property. John rents out the property for 40 days in 2020, and uses it personally 20 days. Can John deduct excess losses, ie depreciation, against his w2 income from a salaried position? Can he deduct the mortgage interest that is unallocated to the rental period, on his schedule A?
2. Same facts, except that John only has 3 days of personal use in the year. Can John deduct excess losses, ie depreciation, against his w2 income from a salaried position? Can John deduct the mortgage interest that is unallocated to the rental period, on his schedule A?
Now lets see if the experts post simple answers to these.
Tagging gurus: @Eamonn McElroy @Ashish Acharya @Jason Collins @Michael Plaks @Natalie Kolodij
@Michael Baum @Nancy Bachety @Arda Bircan @Sammy Habbaz @Chad McMahancould you help with above two scenarios?
also, let’s say prop value/purchase cost is 500k brought in tax year 2023, can bonus depreciation be applied to take max tax deduction on year one ?
i.e 500k (400k building+100k land cost), with cost segregation average 400k X 20% = 80k
can 80k deduction be applied as depreciation, against his w2 income from a salaried position?
- 2yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Quote from @Ron Singh:
Quote from @Martin Nussbaum:
@John Morgan right? one would almost suspect intentionally so, to encourage business, lol. Perhaps its my fault for not simplifying the hypotheticals, and you tell me John if you fall into one of these.
1. John has a vacation home, uses vrbo or abnb, average guest occupancy seven days or less, and John materially participates in managing the property. John rents out the property for 40 days in 2020, and uses it personally 20 days. Can John deduct excess losses, ie depreciation, against his w2 income from a salaried position? Can he deduct the mortgage interest that is unallocated to the rental period, on his schedule A?
2. Same facts, except that John only has 3 days of personal use in the year. Can John deduct excess losses, ie depreciation, against his w2 income from a salaried position? Can John deduct the mortgage interest that is unallocated to the rental period, on his schedule A?
Now lets see if the experts post simple answers to these.
also, let’s say prop value/purchase cost is 500k brought in tax year 2023, can bonus depreciation be applied to take max tax deduction on year one ?
i.e 500k (400k building+100k land cost), with cost segregation average 400k X 20% = 80k
can 80k deduction be applied as depreciation, against his w2 income from a salaried position?
Scenario 1: 40 rental days, 20 personal days. John cannot generate a loss from this property, whether it's STR or LTR, material participation or not, cost segregation or not. No loss allowed.
Scenario 2: 40 rental days, <7 days avg, 3 personal days. As long as John satisfies material participation test, he can deduct losses against his W2.
Scenario 2 + Cost segregation: assuming John placed this property in service in 2023 - yes, he can deduct cost segregation based depreciation. Only 80% allowed in 2023, so $64k, not $80k in your example.
- 2ySean O'KeefePro MemberCPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votesGood feedback
Quote from @Michael Plaks:
Quote from @Ron Singh:
Quote from @Martin Nussbaum:
@John Morgan right? one would almost suspect intentionally so, to encourage business, lol. Perhaps its my fault for not simplifying the hypotheticals, and you tell me John if you fall into one of these.
1. John has a vacation home, uses vrbo or abnb, average guest occupancy seven days or less, and John materially participates in managing the property. John rents out the property for 40 days in 2020, and uses it personally 20 days. Can John deduct excess losses, ie depreciation, against his w2 income from a salaried position? Can he deduct the mortgage interest that is unallocated to the rental period, on his schedule A?
2. Same facts, except that John only has 3 days of personal use in the year. Can John deduct excess losses, ie depreciation, against his w2 income from a salaried position? Can John deduct the mortgage interest that is unallocated to the rental period, on his schedule A?
Now lets see if the experts post simple answers to these.
also, let’s say prop value/purchase cost is 500k brought in tax year 2023, can bonus depreciation be applied to take max tax deduction on year one ?
i.e 500k (400k building+100k land cost), with cost segregation average 400k X 20% = 80k
can 80k deduction be applied as depreciation, against his w2 income from a salaried position?
Scenario 1: 40 rental days, 20 personal days. John cannot generate a loss from this property, whether it's STR or LTR, material participation or not, cost segregation or not. No loss allowed.
Scenario 2: 40 rental days, <7 days avg, 3 personal days. As long as John satisfies material participation test, he can deduct losses against his W2.
Scenario 2 + Cost segregation: assuming John placed this property in service in 2023 - yes, he can deduct cost segregation based depreciation. Only 80% allowed in 2023, so $64k, not $80k in your example.
Tagging gurus: @Michael Plaks
Thanks , would it differ for renting full condo to renter VS part of the home (while owner still lives there)
How about if someone has a 2M home and rents 1 bedroom few days month.
would still qualify for deduction...
lets say 1 bedroom and shared space = 1/8th part of the home
rented 100 days total in a year
can cost segregarion still applies to 1/8th part of the home ?
- 2yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
No, it is different in house-hacking. You cannot create loss in a house-hacking situation at all, with or without cost segregation, LTR or STR.
- Accountant · Houston, TX · Member since 2023 · 148 posts · 41 votes2yYou realize all I literally had to do was Google "irs airbnb active", scroll down and find their position in a Memorandum.
Quote from @Eamonn McElroy:
(1) The IRS has taken no such position. You're welcome to provide a link that reinforces your statement.
(2) I'm much less concerned about what position the IRS takes than what position my clients can support under authoritative guidance. IRC Sec 1402 and the related Treasury regs govern income subject to SE taxes.
(3) No such thing as "active" income in the context of IRC Sec 1402 and 469.
Again, most Airbnb and VRBO belong on Sch E and are not subject to SE taxes. Consult your tax advisor.
Strong language makes weak arguments but you missed that lesson. I guess you also decided other people should back their claims while you pretend you have some idea what you're saying.
"In IRS Chief Counsel Memorandum 202151005 (Dec. 23, 2021), the IRS evaluated two “general” fact patterns for short-term rental arrangements. In the first example, the owner rented out a fully-furnished vacation property through an online rental marketplace. The owner provided linens, kitchen utensils, and various other items to make the property fully habitable for occupants. The owner also provided daily cleaning services, access to dedicated Wi-Fi, access to beach and recreational equipment, and prepaid ride-share vouchers between the rental property and the nearest business district. Although the owner provided significant items and services to guests, they were of a type that is not unusual or extraordinary for the online rental marketplace.The IRS concluded that the net rental income from this example constituted “Net Earnings from Self Employment (“NESE”)
- Accountant · Houston, TX · Member since 2023 · 148 posts · 41 votes2y
Actually yeah they are all over the place, and you would know that if you put in the research and read just even one BNA Portfolio.
But continue being smug to people who are asking for help.
"In determining the amount of reasonable compensation under §162(a)(1), it is necessary to consider both the amount of deferred and nondeferred compensation. 606 The Tax Court and several Courts of Appeals have adopted five factors in determining the reasonableness of compensation:...
The Second and Ninth Circuits have held that the reasonableness of compensation must be assessed from the perspective of a hypothetical or independent investor, not as a separate autonomous factor but instead as “a lens through which the entire analysis should be viewed,” and requiring the application of four factors:
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