Rental Property - How is the Numerator Defined?

[Ephesians3-14]

I have a client who rented out his second home in 2024 for 80 days to unrelated third parties. He also used it personally for 3 days last year.

Since the rental income was short term in nature (rented for 4.3 days per customer on avg), I am reporting it on Schedule C and using Form 8829 to allocate mortgage interest, real estate taxes, utilities, etc.

Two questions:

1. Will the allocation be based on 80/365 x all of those expenses above? Or is it 362/365 since technically the home was "available to be rented" the entire year - with the exception of the few days he used it personally? How is the numerator defined (the top number in the fraction)?

2. Can I deduct on Sched A the portion of the mortgage interest and real estate taxes that is not used on Sched C?

Thanks for any feedback.

[TaxGuyBill]

Back up.

Are "services", such as maid service or meal provided to the tenants?  If not, the rental belongs on Schedule E.  Short term does not change it to Schedule C unless "services" are provided.

Schedule C is only used for a rental if "services" are provided to the tenants (and in those cases, the expenses go directly on Schedule C, not Form 8829).

In answer to your question, the usual method would be 80/83, unless you elect to use the Tax Court method for interest and taxes.

[Ephesians3-14]

Maid services are not provided. Although he does have a local cleaning service that comes in and cleans the place after the renter is done. Not sure if that rises to the level of “maid services”?

I always thought that if you rented the property for less than seven days on average, that made it a trade or business and needed to be reported on schedule C

[TaxGuyBill · Accepted solution]

Nope.  Still on Schedule E.  Self-employment tax does not apply unless "services" are provided.

Because the average rental is 7 days or less, if they "Materially Participate" in it, you should check box "G" to make it non-passive.

[Ephesians3-14]

So most VRBO’s would be reported on schedule E?

What’s the point of the (less than seven day avg” rental rule then? I thought that was what was used to determine whether it gets reported on schedule C.

[rbynaker]

This is a good read:

https://www.irs.gov/pub/irs-wd/202151005.pdf

There are two different things in play, passive activity rules under section 469 and self-employment tax rules under section 1402.

Rick

[Ephesians3-14]

I REALLY appreciate the guidance on this topic. Extremely helpful.

If I can add one additional twist to the question. The mortgage balance on this second residence that is rented out is $1,000,000. Would I apply the 25% non-deductible portion on Sched E first and then let the personal use portion flow to Sched A...OR...would I report the full $27,000 on Sched E and then make the 25% non-deductible adjustment only on Schedule A? 

Thanks for any additional insight.