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Defining Long-Term and Vacation Rentals

By
Education & Training with BOOKKEEPING-RESULTS, LLC

Rental Definition

There are six exceptions to the definition of rental. Under Reg. §1.469- 1T(e)(3)(ii), six types of activities normally defined as rentals, are treated as non-rental activities, i.e., as businesses, in most cases. The active participation standard and the $25,000 allowance do not apply. If the activity falls outside the rental definition, it is passive or non-passive based on if the taxpayer materially participates with six exceptions.

The average period of customer use is 7 days or less. Examples: condo rentals, short-term use of hotel/motel rooms, and businesses that rent videos/tuxedos, cars/tools, etc.

The average period of customer use is 30 days or less and significant personal services are provided with rental. Examples: hotels and motels.

Extraordinary personal services provide with the rental. Examples: hospitals, nursing homes and boarding schools.

The rental is incidental to a non-rental activity.

The taxpayer customarily makes the renal property available during defined business hours or nonexclusive use by various customers. Examples: golf courses, health clubs and spas.

The taxpayer provides the property for use in a non-rental activity o his own partnership, S Corp or joint venture with the key word "provides" not "rents." Example: partner provides property in exchange for an ownership interest and a non-leasing transaction with a partnership.

Vacation Rentals - The AirBNB Trap

Many condos, vacation cottages, time-shares, hotels, motels, and bed and breakfasts have an average rental period of 7 days or less. As a result, these activities are not defined as rentals, but instead are treated as businesses. Net losses from these activities are passive unless the taxpayer participates materially. Because many of these activities have a management company and may not be near to the taxpayer’s residence, materially participating may be difficult.

If a taxpayer or family member uses a vacation property for more than 14 days or 10 percent of the property’s rental time during a calendar year, the personal use limitations of Internal Revenue Code §280A apply and IRC §469 is no longer applicable, i.e., vacation rentals.  Documentation defines disqualification.

Expenses for Tax Purposes

You will still need to keep accurate records and authentication regarding supply replacement, depreciation, property taxes, utilities, etc. for your tax filing and any mileage reimbursement while checking on your property location(s).

Documentation for Audit Purposes

In the potential of an audit, you must have proper documentation by either your management companies, including those who you receive payment for handle repairs and maintenance. Whether it’s through your own payment system or through the management company, the IRS will expect that 1099-NEC is expected to be filed for taxes to be reported. If the management company is handling the reservation, you will likely getting a 1099-K passing the appropriate threshold. This is why it’s important to contact a tax resolution associate with Bookkeeping-Results, LLC if you’re interested in learning if you’re documenting your rentals properly.

 

Show All Comments Sort:
Paddy Deighan MBA JD PhD
http://www.medicalandspaconsulting.com - Vail, CO
Paddy Deighan J.D. Ph.D

mind numbingly complex and a great explanation!! Enjoy the weekend!! 

Sep 13, 2024 08:16 PM
John Pusa
Glendale, CA

Hello Dwayne Briscoe very valuable report for defining long term and vacation rental.

Sep 13, 2024 08:21 PM
Ed Silva, 203-206-0754
Mapleridge Realty, CT 203-206-0754 - Waterbury, CT
Associate Real Estate Broker

Dwayne Briscoe   the vacation rentals in our state established long before the commercial involvement is coming to a boil here in CT with a case before the State Supreme Court which I am lead to believe will set a standard across the countr

Sep 14, 2024 02:48 AM
Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Dwayne, thanks for sharing this valuable information, especially for AirBnB.   Welcome to ActiveRain!

Sep 14, 2024 07:36 AM