Discussion:Vacation home rental - can it ever become schedule C income?

It's interesting because §469 specifically excludes rentals with average stay of 7 days or less from definition of "per se" rental. The editorial content of research service I use states that the rationale for the seven-day rule is that the person furnishing the property for short-term rental is generally required to provide services significant enough to justify the conclusion that the person is engaged in a service business rather than a rental activity. Now I wish I had an actual regulation or case to cite with this language but I don't.

But whether it should go on Schedule C really means should you be paying self-employment taxes - so we look to the rules under §1402 for that determination. Only guidance is §1402(c)-(4)(c) and only example of services performed in conjuction to rental of property that would rise to level of trade or business is maid services.

So our vacation rentals fall in that grey area of the spectrum between hotel and long-term rental.

I believe that reporting on Schedule E is the more conservative approach because these rentals do typically generate losses. Whether you can deduct that loss depends on whether you materially participate. If yes, loss would be deductible whether reported on Schedule E or Schedule C. If no, loss is limited under passive activity rules whether reported on Schedule E or Schedule C.

I think the bigger area for concern by the IRS is taking the $25,000 active participation passive loss allowance on a vacation rental loss.

In the first year of renting a vacation home (purchased specifically for vacation rentals averaging less than 7 days) we (wife and I) anticipate a loss. We are active participants, managing the advertising, screening and approving renters, handling all credit card transactions, cleaning between renters, and all repairs and renovations to the house and property. We have other income significantly in excess of $150K.

We formed a single-member LLC (although property is deeded in my wife and my names, not the LLC's) for this venture, and we'd like to report it on Schedule C so we can take the loss against other earnings (and with $150K+ income we are already over our SE tax limit so the SE tax implication is minimal.)

From the looks of it, reporting on Sched C seems viable and logical for at least this first year, although it paints a target on our backs. Other than the target it paints, any other words of advice? And on a related note, any thoughts on how the IRS would view moving the business activity from Schedule C to Sched E in later years as it starts to turn a profit?

BTW - my wife is a financial service CPA, so we have access to tax professionals we plan to use as well, but this forum seems like a good place to get alternate points of view.

TC

Seems to me that on Schedule C the net loss would *still* be subject to those limitations, and that you're going find yourself needing to establish your material participation in the activity, if the losses are going to be non-passive and deductible.

And having the activity NOT treated as a rental can sometimes be worse than treating it as a rental because the taxpayer doesn't get the $25,000 passive loss allowance under Sec. 469(i).

(This isn't a slam on tax professionals in any way. The same holds true regarding taking the road most often traveled in almost all industries - from computer programmers to electricians, to tax professionals. We all like to stay in our comfort zone, and when confronted with an uncommon situation try to fit the problem to our most comfortable solution instead of the other way around.)