$25000 Loss Limit And Short-term Cabin Rentals
My wife and I have W2 incomes and I own and manage rental properties (apartments) on the side. I recently purchased a lake cabin that I have made available for weekly rentals.
On the IRS website, I read that short-term rentals (7 days or less) are not classified as rental properties and do not qualify for the active participation $25000 loss allowance. It stated that this type of rental activity is classified as a business.
What exactly does this mean? Does this mean that I can not claim a loss at all? Or, does this mean that my loss is not limited to the $25000 cap? Does anybody know...Anybody out there that rents out cabins? Thanks.
Thanks for the information. I did find a different way to handle this. I am working with a company that exclusivly rents out vacation properties...for all different lengths of time. This company will send me a check at the end of each month for a percentage of all the rental income that was collected for the month. In other words, I will do monthly rentals to this vacation rental company, and this company will do short and long-term rentals with individuals and businesses.
As far as I am concerned, I should be able to treat this property the same as I treat any of my other renal properties.
Jasons,
This is quite common in resort areas especially when the owners are out of state. The managment company handles all the daily/weekly rental collections and only sends out a monthly disbursement. Even though you are only paid once a month, this is in no way to be considered a monthly rental business if the average tenant occupancy is seven days or less.
As far as the IRS is concerned, the management company is simply acting as your leasing agent in your business activity.
If your property is rented for some periods that are longer than seven days, and a lot of periods that are shorter than seven days, your tax treatment is determined by the average stay for all your periods of occupancy during the year.
If the IRS says that you are operating an active income business where your income and expenses are reported on schedule C and Schedule SE, you might also have to use the 39-year depreciation schedule for commercial property
Best to consult a knowledgeable CPA on your tax treatment before the IRS appoints an auditor to tell you how it should have been done.[ Edited by NewKidInTown3 on Date 11/22/2005 ]
purplez,
Since jasons owns the property and manages the business, then he materially participates by default. Even though he outsources his day to day managemetn to a professional management company, he still supervises the property manager.
As an active income business, his losses are not constrained by the $25K passive loss allowance that would normally apply to Schedule E rental activities.
Would he really need to treat the property with more than a 7-day average stay differently. I thought I read somewhere, that if you are providing services like towels, linens, etc, this shows that it is a business and not a rental activity. And also, if a tenant can leave at any time without giving a thirty day notice, etc. Also, using a management company that charges a large percentage because they are cleaning and doing marketing also helps to prove that it is a business.
I guess, if it were me, and the average were close to 7 days, and I was operating it like the other two, and if I thought it might be under 7 days in future business years, I would treat this like the other two. In fact, I would roll the numbers together under one business. Can he do this?
I agree Jason. After I have read some more, I have come to the same conclusion.
Amy, I believe your accountant is doing everything correctly because you manage the rental yourself.
In reading through this thread, I have changed my opinion somewhat from what I had posted earlier.
If the property is a less than seven day rental that the owner personally manages himself and for which s/he meets the number of hours material participation rule, then the property can be treated as a Schedule C business.
If the owner outsources management, then it is unlikely that the owner will have enough hours to meet the material participation standard. In this case, the property is a passive non-rental activity. Income and expenses are stil reported on Schedule E, but any tax losses from this activity have to be carried forward and are not eligible to be taken against other ordinary income as a passive loss allowance. If you are using TurboTax to report this type of activity on Schedule E, just answer NO to the "Do you actively participate" question. TurboTax should take the suspended loss without your having to override the default treatment.
In either case, the taxpayer can always choose to use Schedule E for his short term rental activity. The taxpayer can elect Schedule C treatment if the material participation rule is satisfied.
Just how I see it, today.[ Edited by NewKidInTown3 on Date 01/18/2009 ]
If someone materially participates and wants the rental to be an active business or trade with nonpassive income and losses can rental days average more than 30 days and are services provided the main question?