1065 - Entering a Real Estate Business as Short-Term

[tccpg289]

A taxpayer has a 1065 in which they hold real estate and generate rental income.

The rental income is short-term in nature, thus they do not need to classify it as a passive activity when incurring losses.

https://www.hurdlr.com/deductions/airbnb-income-tax#:~:text=Passive%20involvement%20occurs%20when%20....

Regarding where to enter in ProConnect:

Are the buildings depreciated on a 27.5-year useful life?

How is the land portion of the building stripped out?

Where on the 1065 would it be indicated that this is "NOT" a passive activity?

[qbteachmt]

"Where on the 1065 would it be indicated that this is "NOT" a passive activity?"

I think you need to do more research.

"The rental income is short-term in nature, thus they do not need to classify it as a passive activity when incurring losses."

You seem to be confusing time and services provided. You need to know the operations.

Your own link would be used to understand this; click on the other formats, such as Real Estate Agent and Landlord. The passive or active determination is services provided and amount of work put into the operations. Not how long is each rental.

If I lease the house next door to use as AirBnB and hire a housekeeper to come take care of it all as needed, that is Passive.

If I rent out my guest house and manage all the work myself, that is Active.

They are both examples of short-term rental. The timeframe does not determine passive or active. Otherwise, you would tell us the running a hotel is Passive, since no one stays very long.

"Are the buildings depreciated on a 27.5-year useful life?"

It depends on the type of buildings: commercial, residential, storage units, etc.

"How is the land portion of the building stripped out?"

It would be valued separately from improvements and reported as its own asset value.

[tccpg289]

Thanks for the prompt response.

However, if you look at this chart, you can see that the length of a tenant does indeed dictate the categorization. I could be wrong, but just wanted to note:

https://www.hrblock.com/tax-center/wp-content/uploads/2018/05/airbnb-taxes.pdf

[qbteachmt]

"However, if you look at this chart, you can see that the length of a tenant does indeed dictate the categorization."

Your title indicated you are dealing with Real Estate Business.

Of course, if you keep using AirBnB resources, everything will start with the assumption of short-term. You wanted to enter it as "short-term in nature, thus they do not need to classify it as a passive activity when incurring losses." But there is no indicator for "short term" other than Days Rented. You keep pointing to what will make this nonrental, on your way to determine passive or nonpassive.

"A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional." From: https://www.irs.gov/pub/irs-pdf/p925.pdf

You seem to be trying to use something along the lines of: "Under the Internal Revenue Code, the income generated by leasing your property is not considered a rental activity for a taxable year if the average period of customer use for such a property is 7 days or less." From: https://www.snydercohn.com/2021/12/is-your-short-term-rental-activity-really-a-rental-activity/

You already have this as a Business.

If you go to a surgeon, your medical issue is evaluated in the perspective of surgery. If you go to any short-term or AirBnB reference, your tax issue is evaluated in the perspective of short term rentals.

However, if you want to understand Passive or Nonpassive, especially from the perspective of Real Estate Professional and Form 1065, you probably should look at the IRS resources, as well as reference materials for that condition. Go to that IRS Pub, go the section for "Rental Activities" and read along. Follow the links to read about Exceptions, Activities that Aren't Passive Activities, and the part about Real Estate Professional. There is no entering that some activity is Short Term. You determine the type of activity, and enter it accordingly. In your case, you seem to be working on 1065, and a Schedule E. Notice those AirBnB resources don't even mention 1065.

Here is the ProConnect article:

https://proconnect.intuit.com/support/en-us/help-article/form-1099-misc/common-questions-entering-re...

[tccpg289]

I appreciate your help.

So essentially, I understand that you are pointing out the differences between Sch. E and a 1065.

However, it is still not clear to me what rules to follow, if the Sch. E rules are the same for a 1065? Where on the 1065 would the rental activity get reported - P. 1 or the 8825?

[TaxGuyBill · Accepted solution]

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@tccpg289 wrote:

The rental income is short-term in nature, thus they do not need to classify it as a passive activity when incurring losses.

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Not necessarily.  The short-term rental means it is not considered a "rental activity" for purposes of the Passive Loss rules.

So then you go to the 'usual' rules:  Does the taxpayer Materially Participate?  If yes, non-passive.  If no, passive.

Then the next question is do they provide "services" to the tenants?  The Regulation specifically mention maid service and meals as "services", but there could be other things that would be considered as services.

[tccpg289]

Got it, they appear to meet all of the criteria.

I guess after that, does it go on the 8825 in ProConnect? There are multiple properties.

[TaxGuyBill]

Meet the criteria for what?  Material Participation?

Do they provide "services" or not?

[qbteachmt]

"Got it, they appear to meet all of the criteria."

Yes, as both Bill and I pointed out, your own "short term" issue that you stated meets the criteria of Non-Rental. Now the determination is:

Passive or not, based on the activity or operation. You never stated what they are doing or what sort of property this is done with. In other words, what is the business operation and how do the properties relate to that operation? Are you intending to lump them together? Are they all of the same type?

[tccpg289]

They appear to meet the criteria of a short-term rental and passive activity, therefore they are not subject to limitations on the passive activity losses.

They had previously hired a management company, but now they are taking on the responsibility of the daily tasks themselves.

Is this evaluation done on a year-by-year basis? I.e. if they had a management company initially but are now taking on the daily tasks themselves, the status would have changed.

[tccpg289]

Thanks again, see above response for clarification.

[tccpg289]

So it sounds like there are 2 properties in the 1065, with 3 partners.

For 2021, one of the properties qualified for the non-passive, material participation (tenant length, involvement). The other did not.

How would this information be entered in ProConnect to account for these nuances? Would it all go on the 8825?