Clearing Up Confusion: A Common Question on STR and REPS

[John Malone]

We hear many real estate investors assuming that their new portfolio of STRs is setting them up nicely for Real Estate Professional Status and thus will help convert their portfolio of long term rentals to nonpassive.  

However - this is misguided and here it why:

1) Is this activity truly a STR? Although you may call it a short term rental for tax purposes, the property must be rented for an average period of 7 days or less throughout the tax year AND you must materially participate under IRC 469.  Further, you must be cognizant of personal use days (separate topic).  At this point, the property would meet an exception to the rental real estate rules.

2) If you do qualify as a STR for Tax Purposes, the hours you spend on each STR are NOT real estate professional hours.  Why?  You met the exceptions to rental real estate and thus are treating this as a business activity (https://www.law.cornell.edu/cf...)

2a) What if you spent a ton of time researching the property before closing? I was not sure it WOULD be a STR.  This also would not count as the IRS views these as investor hours which do not count towards the REPS status.

3) The Tax Court summarized this nicely...way back in 1996! STRs have been around forever for tax purposes!

 "Petitioner's activities that are related to the Arrow Property are DISREGARDED for purposes of determining if she was a Real Estate Professional, because the Arrow property is NOT "rental real estate" as defined...

If you have BOTH STRs and LTRs, unfortunately these will not combine for REPS! We recommend tracking you STR hours completely separately from LTR hours for this purpose. The more astute auditors do understand this and if you have a mixed use log, it could spell trouble.

[John Underwood]

Great information!

Thanks for providing.