Rental Property

[jsoles24]

My client purchased land in 2022. She intends to build tiny homes to offer for short term rentals on the land but has not yet started to build. She created an single member LLC for this business venture. 

I first completed a Schedule C for this business venture. But after doing further research on whether or not she provided "substantial services", which she will only provide in the future after each guests leaves the premises to prepare for the next guest, I moved all of the related expenses to a Schedule E. 

Is this correct? What are your thoughts?

[TaxGuyBill]

---

@jsoles24 wrote:

My client purchased land in 2022. She intends to build tiny homes to offer for short term rentals on the land but has not yet started to build.

---

With no services, it will end up Schedule E.  However, if it is not being rented yet, it doesn't go anywhere.  Any expenses would be capitalized.

[Just-Lisa-Now-]

cleaning between renters is not a substantial service, this will be Sch E, not C.  But youd only start using Sch E once shes got the rentals available for rent.

She may want to elect to capitalize the carrying costs of that land until its put in service, you'd want to include the 266 election with the return each year. 

[BobKamman]

Cleaning between renters is what many hotels and motels do now, and the IRS guidance is that those businesses go on Schedule C.  There is considerable fog, and little authority on where to draw the line between Schedule C and Schedule E.  One online source, without explaining why, says:

"Generally, you should report your Airbnb activity on Schedule C if the average rental period for the property is less than 7 days or if the average rental is less than 30 days, and you provide substantial services to the renter."

I see an increasing number of people who operate multiple Airbnb locations, often subleasing the property rather than owning it.  I don't have any Airbnb clients, but I think if I prepared a Schedule E for one I would have them sign an acknowledgment that they might be assessed SE tax if IRS does a project on that industry.  Also, that they're giving up substantial deductions for retirement accounts and QBI.  

[PATAX]

If those tiny homes are being built for midgets then your client will only receive half of the deductions.😉🤓 just joking.