Short Term Rental Schedule C vs E

6 Replies

We are closing on a property on Pigeon Forge, TN which will be used as a short term rental. The total use of property will be for <7 days on average, however we will not be providing substantial services to the guests ( for example, daily cleaning/cooking breakfast, maid, touring, picking from airport, etc.). However, we will be involved in the day-to-day functioning of the rental by arranging bookings, answering inquiries, furnishing cabin, repairing cabin, among other activities related to the cabin. 

1. When it comes to filing, which Schedule should be used (Schedule C or Schedule E)? Since we are not providing services similar to a hotel, we believe schedule E is the answer but needed clarification in regards to your interpretation of what constitutes "substantial services".

2. If one of the 7 tests of material participation hours are met and if losses are documented on Schedule E for that tax year. Can these losses (which would be deemed "non passive") be used to offset W2 incomes (non passive)?

Thanks

Obviously want to talk to your CPA since everyone situation is unique but I can tell you that all mine are Schedule E

Pretty sure the only way the losses can offset W2 is if you have Real Estate Professional Status, but again definitely a question you need to ask YOUR CPA. Only they can tell you what applies to your unique situation 

@Luis Lizardo

Thumbs up - pretty good grasp of the tax concepts to ask this question!

My answer is tentative, because I do not have a complete picture of everything going on. If we had an in-depth discussion, maybe my answer would've changed. But for now:

- Schedule E

- losses can offset W2 income

Warning: it might be very difficult to make your DIY tax software behave the way I described.

And circling back to my disclaimer: before treating it this way, I would invest in a professional opinion which involves a thorough discussion of this property and your overall tax/financial situation.

Hi Derek! Thanks for the reply. There have been different interpretations of the tax law with the CPA's we have interviewed and wanted to look for some more consensus here.

Michael - I appreciate your input.

Originally posted by @Luis Lizardo :

We are closing on a property on Pigeon Forge, TN which will be used as a short term rental. The total use of property will be for <7 days on average, however we will not be providing substantial services to the guests ( for example, daily cleaning/cooking breakfast, maid, touring, picking from airport, etc.). However, we will be involved in the day-to-day functioning of the rental by arranging bookings, answering inquiries, furnishing cabin, repairing cabin, among other activities related to the cabin. 

1. When it comes to filing, which Schedule should be used (Schedule C or Schedule E)? Since we are not providing services similar to a hotel, we believe schedule E is the answer but needed clarification in regards to your interpretation of what constitutes "substantial services".

2. If one of the 7 tests of material participation hours are met and if losses are documented on Schedule E for that tax year. Can these losses (which would be deemed "non passive") be used to offset W2 incomes (non passive)?

Thanks

Yes- Schedule E  

Yes- Can offset your W2 income. 

@Luis Lizardo will you be answering questions by guests if they call you? Who is doing the marketing for direct reservations? Are you marketing with a website and/or landing page? If a guest requests you come by to check on something do you provide that service?

I d hate to be audited and come under penalties because I answered yes to questions above.

There are advantages to paying some SE tax and filing a schedule C. The biggest advantage is being able to offset net income of up to $58,000 per year with a Solo 401k.

Originally posted by @Todd Goedeke :

@Luis Lizardo will you be answering questions by guests if they call you? Who is doing the marketing for direct reservations? Are you marketing with a website and/or landing page? If a guest requests you come by to check on something do you provide that service?

I d hate to be audited and come under penalties because I answered yes to questions above.

There are advantages to paying some SE tax and filing a schedule C. The biggest advantage is being able to offset net income of up to $58,000 per year with a Solo 401k.

 We expect to self manage, no property management involved. We will call whoever we need in specific cases. My understanding is we are not providing substantial services and therefore goes on schedule E. Can you direct me to where in the IRS code we will be under penalty if I answer yes to questions above?