The determination as to whether a rental property is deemed ‘short-term’ has important tax consequences. In essence, if a rental property has an Average Period of Customer Use of 7 days or less or an Average Period of Customer use of 30 days or less and substantial services are provided then the rental property is deemed a ‘short term’ rental. Additionally, there are important tax consequences if a deemed short term rental includes ‘material participation’.
1. Personal Use Days
• Equation = number of days rental property was occupied by the owner
– does not include days utilized by the owner for substantial maintenance and repairs of the property
– does not include non-occupied rental use days
2. Average Period of Customer Use
• Equation = total # of active customer rental days (2018) / total # of customers in (2018)
3. Substantial Services
• IRS PUB 527 Excerpt: “Providing substantial services. If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Use Form 1065, U.S. Re-turn of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Substantial services don’t include the furnishing of heat and light, cleaning of public areas, trash collection, etc. For more information, see Pub. 334, Tax Guide for Small Business. Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. For a discussion of “substantial services,” see Real Estate Rents in Pub. 334, chapter 5.”
4. Material Participation
• IRS PUB 527 Excerpt “Material participation: Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year.”
• A trade or businesses is a passive activity if the taxpayer does not materially participate. The taxpayer materially participates if and only if he or she meets one of the following seven tests (provided in Reg. § 1.469-5T(a)):
1. The taxpayer works 500 hours or more during the year in the activity.
2. The taxpayer does substantially all the work in the activity.
3. The taxpayer works more than 100 hours in the activity during the year and no one else works more than the taxpayer.
4. The activity is a significant participation activity (SPA), and the sum of SPAs in which the taxpayer works 100-500 hours exceeds 500 hours for the year.
5. The taxpayer materially participated in the activity in any 5 of the prior 10 years.
6. The activity is a personal service activity and the taxpayer materially participated in that activity in any 3 prior years.
7. Based on all of the facts and circumstances, the taxpayer participates in the activity on a regular, continuous, and substantial basis during such year. However, this test only applies if the taxpayer works at least 100 hours in the activity, no one else works more hours than the taxpayer in the activity, and no one else receives compensation for managing the activity
• Management Company Involved?