Special and complex taxation rules can make the rents that you charge self-employment income. These short-term rentals are reported as business income on a Schedule C, as opposed to a rental activity reported on Schedule E. Therefore, net income is subject to the dreaded SE tax.
Properties Rented for Fewer than 15 Days During the Year – The rental income is not reportable, and the related expenses are not deductible. All qualified interest and property taxes can be reported as itemized deductions on Schedule A. Planning Note: All non-rental property owned should be considered for a two-week rental during the year to generate tax-free income.
For all other properties, i.e., properties that you rent out for 15 days or more, you must consider the following rules:
The 7-Day and 30-Day Rules – While rentals are generally passive activities reported on Schedule E and not subject to the SE tax. However, an activity is not treated as a rental if the average customer use of the property is for 7 days or less or for 30 days or less if the owner (or someone on the owner’s behalf) provides significant personal services. Also, if the owner (or someone on the owner’s behalf) provides extraordinary personal services the property will not be treated as a passive activity and will not be reported on Schedule E as a rental.
If the activity is not treated as a rental, then it will be treated as a trade or business, and the income and expenses, including prorated interest and taxes, will be reported on Schedule C. A loss from this type of activity is still treated as a passive-activity loss unless the taxpayer meets the material participation test – generally, providing 500 or more hours of personal services during the year or qualifying as a real estate professional.
Losses from passive activities are deductible only up to the passive income amount, but unused losses can be carried forward to future years. A special allowance for real-estate rental activities (reported on Schedule E) with active participation permits a loss against nonpassive income of up to $25,000 – phasing out when your modified adjusted gross income is between $100K and $150K.
Please read the excellent article by the IRS Tax Pros for further information. https://www.taxpros.org/blog/short-term-rental-special-treatment/41678
These rules are complicated; please call us to determine how they apply to your circumstances and what actions you can take to minimize tax liability and maximize tax benefits from your rental activities.