VRBO Rental

[david3]

H & W clients own a property that they rent through VRBO. They are not real estate professionals and they say they don't stay at the property for vacations.

So that total losses can be deducted on Sch E, do I check box G "Other passive exceptions" on the Sch E worksheet? Or is there another box that should be checked?

If, in a future year, they do use the property more than 14 days, or more than 10% of the days rented, then I would think the rental changes from non-passive to passive. Therefore, the reporting can change from non-passive to passive each year based on if the property is subject to the vacation home rules. Is this correct?

Thank you.

[sjrcpa]

Why isn't it passive?

[david3]

They spend at least 100 hours, and more than anyone else and the average rental days are 7 days or less.

[Just-Lisa-Now-]

Sounds like it belongs o Sch C, not E

Schedule C Requirements for Airbnb and VRBO Hosts

Generally, you will file Schedule C for your short-term vacation rental if: The average guest rents the property for fewer than 7 days,   OR   The average guest stay is fewer than 30 days AND you provide guests with “substantial services”

[david3]

If substantial services are provided, similar to a bed and breakfast, then it would be reported on Schedule C.

However, if insubstantial services and routine services are provided then it isn't reported on Schedule C.

Cleaning is done in between renters, not during their stay. No hotel-like services are provided.

So, is box G "Other passive exceptions" the correct box to check on the Schedule E worksheet?

Thank you for helping with this.

[Just-Lisa-Now-]

if: The average guest rents the property for fewer than 7 days,   OR   The average guest stay is fewer than 30 days AND you provide guests with “substantial services”

You reiterated multiple times that the average stay is less than 7 days.

[BobKamman]

Last time I checked, the closest guidance from IRS or the courts was a case involving a trailer park, decades ago.  For now, Airbnb and VRBO rentals are either a square peg that might fit in a round hole, or a round hole that might fit into a square hole.  Anyone who thinks the answer is something other than "depends on the facts and circumstances" is, well, at least entitled to an opinion.  

[david3]

Lisa,

The reason I mentioned that the average days rented was less than 7 days is to state that it qualifies as nonpassive.

That doesn't require the VRBO to be reported on Sch. C and, therefore, be subject to SE tax.

Only if substantial services are provided will the rental property be reported on Sch. C and be subject to the SE tax.

If my understanding isn't correct then please give me a cite that says that renting for less than an average of 7 days and not providing substantial services, requires the rental property to be reported on Sch. C and is subject to the SE tax.

Thank you.

[Just-Lisa-Now-]

Im not digging for an IRS cite, but ANY website you read, explains that if your average guest stay is 7 days or less, it goes on Sch C, regardless of substantial services, its only when the average stay is 30 days or less then the substantial services comes into play.  Sch C takes care of your non-passive situation.

https://financialsolutionadvisors.com/blog/do-rental-property-owners-file-schedule-c-or-schedule-e/

[BobKamman]

That's because all the websites cite each other as the source.  Trace it back and you'll find it's all based on some trailer park a long time ago.  As Donald Rumsfeld would say, how Airbnb's and VRBO's are taxed is a known unknown.  

[david3]

Lisa,

I appreciate your help with this.

All of the websites I have read say that the rental is required to be reported on Sch. C and is subject to SE tax if the property is rented for an average of 7 days or less AND substantial services are provided.

I haven't seen any websites that say that the rental income is subject to SE tax  if the average stay is 7 days or less and substantial services aren't provided, .

That is strange that you are reading that it is reported on Sch. C and whatever I have read says it is reported on Sch. E as nonpassive income.

Bob,

I haven't been able to find the court case you are referring to. Can you provide a link please? 

[BobKamman]

@david3 You haven't been able to find the court case, so you're happy to go along with whatever websites quote whatever other websites that found something that really isn't close to what's happening in the real world now.  Just wait until AI starts manufacturing fake cites when there aren't any real ones.  Anyway, I spent considerable time exploring this rabbit hole when I first tried to track down the sources for those online sources, because I'm more curious than some people who just want a quick and friendly answer.  But it takes me less time now.  The first one that popped up was actually a Social Security ruling on SE tax but it cites this case:

"Thus, the United States Tax Court in Fabian Bobo followed the rule of law laid down by the United States Court of Appeals for the 9th Circuit in Delno in concluding that income from a mobile home park was considered rentals from real estate, unless the services provided for the convenience of the tenants were of such substantial nature that compensation for them could be said to constitute a material part of the payments made by the tenants."

https://www.ssa.gov/OP_Home/rulings/oasi/47/SSR86-12-oasi-47.html#

The case is so old (1978) you can't find it on the Tax Court website, but it's here:

https://casetext.com/case/bobo-v-commr-of-internal-revenue  

And it cites a 1965 Ninth Circuit case, Delno, at

https://casetext.com/case/delno-v-celebrezze 

So if you want to rely on cases decided before the Internet was invented, you won't be the first.  Lots of websites are already doing it.  

[BobKamman]

The Bobo case inspired IRS to issue a Revenue Ruling in 1983.  Back in those days, IRS issued a lot of Revenue Rulings.  They agreed with the Tax Court decision and elaborated on what they thought was important to know. For owners of trailer parks.  And actually, you can now find trailers on Airbnb.  

https://www.taxnotes.com/research/federal/irs-guidance/revenue-rulings/rev-rul-83-139/dfm7 

And then there is this from the Treasury Regulations, which are a higher authority than Revenue Rulings and (at least in the mind of IRS auditors) the Tax Court:

 (2) Services rendered for occupants. Payments for the use or occupancy of rooms or other space where services are also rendered to the occupant, such as for the use or occupancy of rooms or other quarters in hotels, boarding houses, or apartment houses furnishing hotel services, or in tourist camps or tourist homes, or payments for the use or occupancy of space in parking lots, warehouses, or storage garages, do not constitute rentals from real estate; consequently, such payments are included in determining net earnings from self-employment. Generally, services are considered rendered to the occupant if they are primarily for his convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only. The supplying of maid service, for example, constitutes such service; whereas the furnishing of heat and light, the cleaning of public entrances, exits, stairways and lobbies, the collection of trash, and so forth, are not considered as services rendered to the occupant.

https://www.law.cornell.edu/cfr/text/26/1.1402(a)-4 

[david3]

Thanks, Bob.

[Taxes-by-Rocky]

CCA 202151005 or the QuickFinder might be helpful.  Good luck.

[BobKamman]

@Taxes-by-Rocky CCA's have taken the place of Revenue Rulings at the IRS opinion factory, and as they say "This advice may not be used or cited as precedent."  More importantly, this one says in two places that the answer "depends on the facts and circumstances of each specific case."  It does answer one question I had, about the origin of the "seven-day rule."  It relates to Treas. Reg. § 1.469-1T .  The "T" means that they expire after three years, unless issued before 1989.  Good luck figuring out the issuance date for that one.  But Section 469 deals with passive vs. active, not Schedule C vs. E.  

In addition to the two court cases I have mentioned above, the CCA refers to  Johnson v. Commissioner, 60 T.C. 829, which involves "boat stall" rentals; and Hopper v Commissioner, 94 T.C. 542, which involves storage units.  The two fact situations in the CCA are not the same as the one described in this post.  Nevertheless, it's a good place to start (back when I first researched this question, I think it's probably where I started).  But the message is, "we don't really know until someone disagrees with our position and takes us to court.  And even then, we might not acquiesce."

So if the activity is showing a profit, it's likely to be found on Schedule E.  And if it's showing a loss, it's likely to be found on Schedule C.  But practitioners should understand the risks and rewards of either position.  

[TaxGuyBill]

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@Just-Lisa-Now- wrote:

Sounds like it belongs o Sch C, not E

Schedule C Requirements for Airbnb and VRBO Hosts

Generally, you will file Schedule C for your short-term vacation rental if: The average guest rents the property for fewer than 7 days,   OR   The average guest stay is fewer than 30 days AND you provide guests with “substantial services”

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Sorry Lisa, that isn't correct.

There are two different things going on here.

Rental of real estate is NOT subject to SE tax unless (a) "services" or provided or (b) the taxpayer is real estate "dealer".

If no services are provided, it goes on Schedule E because SE tax does not apply.  I suppose hypothetically in some situations you could put it on Schedule C with no SE tax, but that will be nightmare, so it should be on Schedule E,

The 7 day and 30 day with services are to determine if it is a "rental activity" for purposes of Passive Losses.  But that has nothing to do with SE tax or what Schedule it belongs on.  It is only for purposes of Passive income/losses.

If meets the 7 day or 30 day with services test, it is non-passive *IF* they Materially Participate.

@david3 If that is the case, yes, you check the "other passive exceptions" box and the Material Participation box.

No, if they use the home 14 days/10% that makes it NON-passive, regardless of how it otherwise used (see #3 in the link below).  But yes, the Vacation Home limits would apply.

https://www.irs.gov/publications/p925#en_US_2023_publink1000104579

[david3]

Thanks, everyone for your help with this.

My head is hurting. 🙂

TaxGuyBill, thanks for the Pub. 925 link. Based on the Rental Activities Exceptions #1, if the average period of customer use of the property is 7 days or less, then it isn't a rental activity.

This appears to support Lisa's position that it isn't reported on Sch. E but on Sch. C. Everything I have read says that it still goes on Sch. E because no substantial services are provided. Also, the activity is considered nonpassive and the full loss is deductible.

Also, the TPs don't use the property for personal use and they don't meet the material participation test but they do meet the active participation test.

So, if I check the "other passive exceptions" box and not the material participation box but I check the active participation box, will this be the correct treatment? Does the rental qualify for deduction of the full loss on Sch. E?

Boy, this has turned to confusing.

Thanks for your help.

[Taxes-by-Rocky]

The structure of these tax laws have too many definitional problems at the outset: (i) what is real v. personal property; (ii) when do you rent an asset verses use it in running your trade or business; (iii) how much of your physical effort is required to earn a buck (SECA or NIIT); and (iv) when are you special enough to take losses (i.e., passive, active, materially participating or something else altogether).

Presented with a similar dilemma, it took these guys only four minutes to reach a well-reasoned conclusion.  If only Congress could do that.  She's a witch! (youtube.com)

[TaxGuyBill · Accepted solution]

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@david3 wrote:

then it isn't a rental activity.

This appears to support Lisa's position that it isn't reported on Sch. E but on Sch. C.

Also, the TPs don't use the property for personal use and they don't meet the material participation test but they do meet the active participation test.

Does the rental qualify for deduction of the full loss on Sch. E?

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No, as I said in my original comment, it is not a "rental activity" ONLY for purposes of passive income/loss purposes. For other purposes, it *IS* still a rental that belongs on Schedule E.

If they don't Materially Participate, it is a Passive Activity.  That means you DON'T check the "other passive exceptions" because it *IS* passive.  It will be subject to the usual Passive Activity rules.

[david3]

Thank you all for your help on this.

TaxGuyBill,

I read through all the information regarding STR and passive vs. nonpassive activities.

The TP does meet the material participation test - the 2nd test, "Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn't own any interest in the activity".

I was focused on the 500 hours and the 100 hours test. 

Therefore, you are correct in that it will be reported on Sch. E with the "other passive exceptions" box checked and the "material participation" box checked.

Thank you.

[david3]

That brings up another question-

If the TP did not have material participation in 2022, when the STR property was purchased, but does have material participation in 2023, how do you handle changing the depreciation in PS from 27.5 years to 39 years?

My understanding is that you can't change depreciation without a 3115 application.

[TaxGuyBill]

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@david3 wrote:

If the TP did not have material participation in 2022, when the STR property was purchased, but does have material participation in 2023, how do you handle changing the depreciation in PS from 27.5 years to 39 years?

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Material Participation has nothing to do with the depreciation recovery period.  A short-term rental is 39 years regardless if they Materially Participated or not.

Tax year 2023 should be 39 years.  They technically should amend 2022 to correct it, but if they don't want to do that, you can still prepare a correct 2023 tax return.

Because they used the wrong depreciation recovery period for only one year, you can switch to 39 years without Form 3115.  However, if they don't amend, you are supposed to enter the amount they actually claimed last year as "prior depreciation".

[david3]

Thank you for the clarification and all of your help.