I have a long term rental (SFR) which I converted to an Airbnb in October 2019. My property manager is acting as the host and we have already had multiple bookings.

Questions:

1. Is the Airbnb considered "Active" so that it is reported on Schedule C instead of on Schedule E as a passive activity?

2. Provided I am to report the Airbnb activity on Schedule C, can I use the net loss (from painting, decorating, repairs, purchase of washer, dryer, furniture, bedding, linens, towels, etc) for 2019 on this activity against other active income such as W-2 income?

Thank you for input.

@Craig Lessler

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?

@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.

(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.

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. 

@Craig Lessler , 

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.   

@Craig Lessler

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.

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

@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. 

@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.*

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. 
 

@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.

@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. 

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.

@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. 

Wow, well this thread has been confusing. I’ve been reporting mine as passive schedule E for the last 6 years.

@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.