Schedule E - filing as non-passive income

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Schedule E - filing as non-passive income

Pam Smith
Member since 2020 · 43 posts · 32 votes

Hi all-

I was reading one of the blog posts on the Short Term Shop blog about Schedule E vs C, passive vs non-passive. In the blog, they reference, "According to Treasury regulations, vacation rental owners who rent their property out for seven days or less on average do not fall under standard rental regulations, meaning that they'll be able to file their income as non-passive instead, without worrying about qualifying for professional status." 

Does anybody know the exact Treasury regulation that I can reference to my CPA. He's not bought into this. I know I can switch my CPA but we've been with him for a long time and he's been good thus far. Does a ton of commercial real estate, very few short-term rentals.

Thanks!

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Lauren Kormylo
Rental Property Investor · Phoenix, AZ and Rehoboth Beach DE · Member since 2019 · 1k+ posts · 1k+ votes
3y

The H&R Block flow chart for STRs https://www.hrblock.com/tax-ce...

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  • Luke CarlPro Member
    Rental Property Investor · Tennessee Florida · Member since 2016 · 4k+ posts · 5k+ votes
    3y

    I can’t imagine the shop got that in depth with tax codes unless they were direct quotes or something. It’s not our wheelhouse. I know it’s confusing so I’ll do my best…. 

    You’ll want to ask your CPA about this but my cpa puts my rental income on schedule E. Both long term and short term. 

    Yes 7 days or less leans towards schedule C. But so does daily turns and food prep. So if you’re not cooking them dinner or making the bed every day you should be fine. 

    Again. Not a cpa! I’m sure one will come along. 

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    3Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    3y

    I agree with @Luke Carl. There has been some chatter on the forums about this so I put in an email to my CPA who is an investor as well to get some clarification.

    I know our CPA files a Schedule E for us.

    1Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    3y

    I went with Schedule C, as that is pretty clear (to me) that this is how the IRS now views this business (STRs) similar to hotels.

    It is your decision right now, so what benefits you the most? I want to take all deductions instead of depreciation (due to a lot of recent repairs and remodeling) so I instructed my CPA to use SCH C. He balked until I sent him all the IRS info, then he decided I was right.....

    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    3y

    I have my STR'S on schedule E.

    Seems to be somewhat of a grey area.

    Without providing substantial services, my understanding is it should be on schedule E.

    1Reply
  • Lauren Kormylo
    Rental Property Investor · Phoenix, AZ and Rehoboth Beach DE · Member since 2019 · 1k+ posts · 1k+ votes
    3y

    The H&R Block flow chart for STRs https://www.hrblock.com/tax-ce...

    3Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y

    My understanding is it goes on schedule E still but you can deduct against W-2 income if you qualify as material participation. In essence you get the benefits of schedule C filing, but still being able to file on schedule E provided you do not provide substantial services.

    Perhaps a CPA can confirm, I have an accounting degree but I’m not a practicing CPA, it’s just my interpretation 

    2Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    3y

    Thanks for that chart @Lauren Kormylo. Really good info.

    0Reply
  • Lauren Kormylo
    Rental Property Investor · Phoenix, AZ and Rehoboth Beach DE · Member since 2019 · 1k+ posts · 1k+ votes
    3y
    Quote from @Michael Baum:

    Thanks for that chart @Lauren Kormylo. Really good info.


     You’re welcome!

    0Reply
  • Nancy Bachety
    Rental Property Investor · North Fork, NY · Member since 2016 · 1k+ posts · 631 votes
    3y

    It’s schedule E unless you provide services like cooking breakfasts ( think old school b and b’s). It’s not really open to interpretation, it’s pretty cut and dry. Most of us use schedule E, don’t provide substantial services, and qualify for material participation. Whether hosts know it or not, this is how a cpa would process it.
    But I’m not a cpa, I just trust and verify. No doubt your savvy CPA will understand it once he reads up on it. No need to replace her/him. 

    2Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y
    Quote from @Nancy Bachety:

    It’s schedule E unless you provide services like cooking breakfasts ( think old school b and b’s). It’s not really open to interpretation, it’s pretty cut and dry. Most of us use schedule E, don’t provide substantial services, and qualify for material participation. Whether hosts know it or not, this is how a cpa would process it.
    But I’m not a cpa, I just trust and verify. No doubt your savvy CPA will understand it once he reads up on it. No need to replace her/him. 

    To qualify for deductions against W-2 though you need to actually materially participate. Just self managing from a remote distance will not normally qualify and this is where people get tripped up on it. 
    1Reply
  • Nancy Bachety
    Rental Property Investor · North Fork, NY · Member since 2016 · 1k+ posts · 631 votes
    3y

    Self managing from a remote distance is the definition of material participation. Unless you don’t self-manage or you rely on property managers to do your work. Doing this work is exactly what qualifies you for materially participation. 

    @John Carbone

    1Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y
    Quote from @Nancy Bachety:

    Self managing from a remote distance is the definition of material participation. Unless you don’t self-manage or you rely on property managers to do your work. Doing this work is exactly what qualifies you for materially participation. 

    How many different cleaners do you have? How do you document your time working on it for 100 hours?
    0Reply
  • Michael Meegan
    Rental Property Investor · Delmar, MD · Member since 2020 · 32 posts · 13 votes
    3y

    I've been researching the short term rental loop hole alot and right now I'm trying to figure out whether to depreciate over 39 or 27.5 and whether or not I have passive activity loss limitations like the $25k cap up to $100K of non-passive income (W2) and then the $25K phases out as you approach $150K of non-passive income (W2) and now I also need to start understanding the difference between schedule C and E and also how I handle renovation expenses whereas are they depreciated or simply deducted. The de minimis safe harbor thing-a-ma-jig is in there and the other caveat is that my STR is an addition on my house. It makes up 24% of my total floor plan and it's exclusive for my guests. My average daily use is 7 days or less, I do not provide services and I did materially participate at least 100 hours and more than any other individual and when I say individual I mean human and I have time logs from them. And my materially participating hours steer clear of investor research, booking keeping, paying bills, traveling to events and education hours.


    So which of the schedules, C or E, are you subject to the 15.3% self-employment tax that I keep hearing about? 

    2Reply
  • Andrew Simms
    Rental Property Investor · Marietta, GA · Member since 2017 · 131 posts · 101 votes
    3y

    Time to turn on the Bat-Signal of STR accounting: @Brandon Hall 

    Refer to IRC Section 469 and 1402. 

    *Not a CPA, don't pretend to be, just providing additional information to that described above*

    0Reply
  • Simon W.Business Member
    Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 662 votes
    3y
    Quote from @Michael Meegan:

    I've been researching the short term rental loop hole alot and right now I'm trying to figure out whether to depreciate over 39 or 27.5 and whether or not I have passive activity loss limitations like the $25k cap up to $100K of non-passive income (W2) and then the $25K phases out as you approach $150K of non-passive income (W2) and now I also need to start understanding the difference between schedule C and E and also how I handle renovation expenses whereas are they depreciated or simply deducted. The de minimis safe harbor thing-a-ma-jig is in there and the other caveat is that my STR is an addition on my house. It makes up 24% of my total floor plan and it's exclusive for my guests. My average daily use is 7 days or less, I do not provide services and I did materially participate at least 100 hours and more than any other individual and when I say individual I mean human and I have time logs from them. And my materially participating hours steer clear of investor research, booking keeping, paying bills, traveling to events and education hours.


    So which of the schedules, C or E, are you subject to the 15.3% self-employment tax that I keep hearing about? 


    Just wanted to say 27.5 vs 39

    27.5 = Residential: Apartments and Rental Homes. 
    39 years = Commercial buildings: ex. hotels, retail, warehouses, motels, casinos, restaurants, and others.

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  • Bonnie Griffin KaakePro Member
    Real Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
    3y
    Quote from @Pam Smith:

    Hi all-

    I was reading one of the blog posts on the Short Term Shop blog about Schedule E vs C, passive vs non-passive. In the blog, they reference, "According to Treasury regulations, vacation rental owners who rent their property out for seven days or less on average do not fall under standard rental regulations, meaning that they'll be able to file their income as non-passive instead, without worrying about qualifying for professional status." 

    Does anybody know the exact Treasury regulation that I can reference to my CPA. He's not bought into this. I know I can switch my CPA but we've been with him for a long time and he's been good thus far. Does a ton of commercial real estate, very few short-term rentals.

    Thanks!

    Hi Pam, Here is a post of mine with links that answers your question and more: 

    Let me clarify...You are not alone...this is a common misunderstanding by both tax professionals and investors. STR must be depreciated over 39 years like a hotel. Think of it this way, even if a hotel/motel is owned by an investor and he/she has managers who run it on a daily basis, it must be depreciated over 39 years. Same for a STR. Long-term rentals of residential properties is over 27.5 years and are treated as such. Therefore, if you are going from a STR to LTR or the other way around, a 3115 Change of Accounting Form is needed to switch from one to the other.

    You are right that if you are not providing significant services yourself, it is passive. It still needs to be depreciated over 39 years. Whether or not your tax professional is filing on a schedule C or not depends on whether you are materially participating in the on-going intensive management of the property. Schedule C and 39-year depreciation are mutually exclusive.

    The following excerpt from Accounting Today explains it well:

    Depreciation considerations of short-term rental ownership | Accounting Today

    "The second issue that short-term rental owners need to consider is the correct depreciable life to utilize. Most owners assume their rental will be depreciated over 27.5 years as residential rental property. However, this is often not the case. According to the IRS, 27.5-year assets are reserved for assets in which 80% or more of the income is being generated from dwelling units. To get the 27.5-year life, these dwelling units cannot be utilized on a “transient basis.” The IRS traditionally defines “transient” as stays of 30 days or less. This means most short-term rentals would be considered nonresidential and have a depreciable life of 39 years, similar to a hotel."

    As for whether to use Schedule C or E, see the clip below, it should help. You can also find more detailed information at
    Short-Term Rentals: Schedule E or C? – Tax Smart Real Estate Investors (taxsmartinvestors.com)

    "To determine whether a short-term rental is reported on Schedule C or E, we ask: did the landlord provide services to the tenants that trip Sec. 1402?

    If the answer is yes, report the short-term rental on Schedule C. If no, Schedule E."

    I hope this helps. 

    [email protected]303-475-4459
    0Reply
  • Nancy Bachety
    Rental Property Investor · North Fork, NY · Member since 2016 · 1k+ posts · 631 votes
    3y
    Quote from @John Carbone:
    Quote from @Nancy Bachety:

    Self managing from a remote distance is the definition of material participation. Unless you don’t self-manage or you rely on property managers to do your work. Doing this work is exactly what qualifies you for materially participation. 

    How many different cleaners do you have? How do you document your time working on it for 100 hours?
    I have couple of cleaners at each one. I document my hours on a spreadsheet, including what specific task, what time of day starting and ending, total time on each to the nearest minute. Specific property for certain tasks only. 
    Because I needed to start this document after the first of the year looking back, I looked at my guest log and knew exactly what tasks would have been necessitated. It was easy, logical and expected and very  realistic. My hours are more than any one cleaner. 
    0Reply
  • Bonnie Griffin KaakePro Member
    Real Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
    3y

    For further clarification of Schedule C or E, maybe this will help. 

    Schedule C if you as the owner provided services that trip Treas. Reg. Sec. 1.1402(a)-4(c). These are services for the convenience of the occupants other than rental of the space. Otherwise, Schedule E is what your tax professional will use. https://www.irs.gov/pub/irs-wd/202151005.pdf (see pages 3 & 4)

    [email protected]303-475-4459
    1Reply
  • Nancy Bachety
    Rental Property Investor · North Fork, NY · Member since 2016 · 1k+ posts · 631 votes
    3y

    The ^^ irs guide is your best friend. Trust it before anyone else.

    2Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Pam Smith:

    Hi all-

    I was reading one of the blog posts on the Short Term Shop blog about Schedule E vs C, passive vs non-passive. In the blog, they reference, "According to Treasury regulations, vacation rental owners who rent their property out for seven days or less on average do not fall under standard rental regulations, meaning that they'll be able to file their income as non-passive instead, without worrying about qualifying for professional status." 

    Does anybody know the exact Treasury regulation that I can reference to my CPA. He's not bought into this. I know I can switch my CPA but we've been with him for a long time and he's been good thus far. Does a ton of commercial real estate, very few short-term rentals.

    Thanks!


     This is the augusta rules that corvee software keep propagating. Basically if you rent less than 14 days do not even report it.

    https://corvee.com/blog/tax-pl... 

    now if someone doesn't agree with that interpretation, it's your own decision.

    1Reply
  • Chris Henry
    Savannah, GA · Member since 2022 · 34 posts · 14 votes
    3y

    So, just a basic hypothetical question: under which do you pay less? I can never tell in these discussions which one people are trying to justify. Lol

    2Reply
  • Bonnie Griffin KaakePro Member
    Real Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
    3y

    @Michael Meegan All STRs must be on a 39 year depreciation schedule. Unfortunately, I see many depreciation schedules for STR being done by CPAs/tax professionals being done on 27.5 years. It does not matter whether the STR is active or passive, it gets 39 year depreciation. If you want more information, I have a Q&A document I can send you on STRs with links to IRS regs as well.

    [email protected]303-475-4459
    0Reply
  • Adam M Sommer
    Member since 2023 · 3 posts · 2 votes
    3y

    The H&R Block flow chart is super useful - thank you for sharing.

    I am debating using a PM for my next STR. Would using a PM vs self-manage mean I have to report as passive? Is there a way to be non-passive with a PM managing the unit?

    e.g., the first month I own the unit I will be working on it (over 100 hours for sure), painting, buying & placing furniture & finishings, getting permits and inspections etc....and then hand over to the PM.  

    I have very large passive carry-overs from real estate that I'd love to realize, and just need to get to that active professional to do so.  Just not sure if using a PM will mess that up...

    0Reply
  • Greg O'BrienBusiness Member
    Accountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
    3y

    @Bonnie Griffin Kaake 99% of new investor returns our team reviews has STRs improperly depreciated over 27.5 years!

    1Reply
  • Greg O'BrienBusiness Member
    Accountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
    3y

    @Pam Smith https://www.biggerpockets.com/topics/1056436

    0Reply
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