Airbnb - residential depreciation or commercial

[ptax255]

Hi, client has part of the home (dettached) that airbnbs. Does not provide substantial services nor qualifies as RE professional so I think sch E is appropriate. However, is the property depreciated over 39 years or 27.5 years? Is any short term rental over 39 years or are there are other things to consider? Thank you.

[Strongsilence-CPA]

Are you self-employed?  Do you have staff?

[Terry53029]

In general, class life for Airbnb's is 27 1/2 years. If rented under 7 days OR substantial services use schedule C. Schedule E for no substantial services OR longer than 7 days. 

[TaxGuyBill]

Short term rentals that are 30 days or less (or is it "less than 30 days"?) are depreciated over 39 years because it is "transient" housing.

You are correct, no services means Schedule E.

[Terry53029]

@TaxGuyBill that's why I said "in general" as we usually don't have all the info.

[ptax255]

Since I'm getting slightly different answers - what is the IRS definition of transient? Is it strictly # of days rented? Less than 30 days or less than 7?

This is what I could find dated 2007. But what does "generally" mean? What's an example rented less than 30 days but depreciated over 27.5 years?

“Lodging facility” is defined in section 856(d)(9)(D)(ii) as a (l) hotel, (ll) motel, or
(lll) other establishment more than one-half of the dwelling units in which are used on a
transient basis. The term “transient” is not defined in section 856 or the regulations
thereunder. However, for other purposes of the Code, a renter has generally been
treated as “transient” if the rental period is less than 30 days.

https://www.irs.gov/pub/irs-wd/0840028.pdf

Also, this from EY and Airbnb says generally 27.5 years. 

https://assets.airbnb.com/eyguidance/us.pdf

Thank you!

[BobKamman]

That's an interesting question.  I think most Airbnb rentals are less than 7 days, so I think it's obviously "transient."  However, there seems to be an 80% rule, and the question is whether you count the entire property, including the part where the taxpayer has residential personal use.  There is an example in some IRS publication that says for office  in home, it's 39 years, unless your home is in an apartment building that you own and rent out other units for residential use, and then you get to use 27.5 years.  This seems to derive from the last part of Section 168(e):

(2) Residential rental or nonresidential real property.

(A) Residential rental property.

(i) Residential rental property. The term "residential rental property" means any building or structure if 80 percent or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units.

(ii) Definitions. For purposes of clause (i) --

(I) the term "dwelling unit" means a house or apartment used to provide living accommodations in a building or structure, but does not include a unit in a hotel, motel, or other establishment more than one-half of the units in which are used on a transient basis, and

(II) if any portion of the building or structure is occupied by the taxpayer, the gross rental income from such building or structure shall include the rental value of the portion so occupied.

[taxmo]

(This is supposed to be a reply to Terry53029's answer.  It looks like the replies aren't showing up under the right post currently.)

You're thinking of something different.  The depreciation period is determined by § 168, which results in the correct answer which is it's 39 years if the average stay is 30 days or less.

What you're thinking of is § 169 (the passive loss rules), which is unrelated to determining the depreciation period.  Under § 169, a rental is potentially non-passive if it has an average stay of 7 days or less (or less than 30 days with "significant personal services"), and also they materially participate, then it is non-passive.  But it still goes on Schedule E, not C.  The difference is it can bypass form 8582.  To do that, choose the non-passive option in your tax software. 

[Terry53029]

Whether it is on schedule C or E has nothing to do with deprecation. Class life of all residential rentals is 27 1/2 years. Airbnb has very strict rules to join, and this posting is about Airbnb, and not motels, as Airbnb do not allow hotels, and motels to join. Therefore according to instructions to their members (prepared by  Ernst & Young LLP) most members will use schedule E to report rental income, as they usually only rent their home with no services. 

[taxmo]

A report from E&Y isn't an authoritative source, the tax law is.  And §168(e)(2)(A) defines "residential rental property", and it excludes "a unit in a hotel, motel, or other establishment more than one-half of the units in which are used on a transient basis".  

Section 168 does not clearly define transient basis, the tax courts have upheld that the tax code generally defines transient basis as an average stay of 30 days or less in other sections of the tax code, including section 1.48-1(h)(2)(ii), and also backed up by PLR-139827-07.  § 168 pre-dates Airbnb and wasn't written with modern STRs in mind, but it does apply to any type of "transient" (short-term) rentals, and there isn't an exception if the property is a house vs. some other type of building.

Someone renting their home on Airbnb with an average stay of less than 30 days has to depreciate it over 39 years, not 27.5. 

Yes, this is unrelated to whether it goes on Schedule C or E, but I just wanted to correct that part of your original comment to point out that even with an average stay under 7 days, it still doesn't go on Schedule C.  Short-term rentals still go on E, with the only exception being substantial services, which is very rare and not typical of an Airbnb.  

A side note about that E&Y tax guide, it's very unfortunate that they not only didn't give correct advice on depreciation, they also didn't mention the STR loophole/strategy at all, which is probably the most relevant tax advice someone with an STR should be made aware of.  At least their Schedule C vs. E information was correct. 

[Terry53029]

I am aware that A report from E&Y isn't an authoritative source. In your earlier reply you said deprecation was 39 1/2 years, and that is incorrect. residential rental ( which is the subject matter being discussed) deprecation is 27 1/2 years. The advice given was for members of Airbnb, and their advice to most members was correct. I realize there are always exceptions, but as stated earlier the topic of this discussion is on deprecation of a client renting his home as a member of Airbnb, and that is 27/1/2 years   

[TaxGuyBill]

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@Terry53029 wrote:

 you said deprecation was 39 1/2 years, and that is incorrect. residential rental ( which is the subject matter being discussed) deprecation is 27 1/2 years. 

deprecation of a client renting his home as a member of Airbnb, and that is 27/1/2 years   

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Are you intentionally ignoring the part about "transient" in regard to if something meets the definition of Residential Rental Property?

[BobKamman]

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@taxmo wrote:

the tax courts have upheld that the tax code generally defines transient basis as an average stay of 30 days or less in other sections of the tax code,

I thought there was only one Tax Court, but then what do I know?

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