CONDOS, B&Bs, HOTELS, ETC. Short-Term Rentals
Page 5
CONDOS, B&Bs, HOTELS, etc.
•Vacation Condos •Vacation Houses •Beach cottages •Hotels •Motels •Hostels •Bed & Breakfasts •Ski lodges •Time Shares
FOR RENT!
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Reg. 1.469-1T(e)(3)(ii)
SHORT-TERM RENTALS
If average use is more than 7 days and there are few services, activity is a rental. Deduct up to $25,000 in losses IF MAGI less than $100,000. If more than $150k… Losses go on Sch. E. If average use is 7 days or less, TP must material participate!
FOR RENT!
If average use is 30 days or less, and significant personal services provided, TP must materially participate. Income & expenses go on Sch. C.
Reg. 1.469-1T(e)(3)(ii)
SHORT-TERM RENTALS
IF average use is 7 days or less, TP must material participate!
If average use is 30 days or less, and significant personal services provided, TP must materially participate. Activity is not a rental. No $25,000 offset. If no material participation, losses not deductible unless TP has passive income (rare)! Losses go on Form 8582 line 3b, not 1b. Income & expenses generally go on Sch. C.
Income & expenses go on Sch. C! If average use is 7 days or less, Activity falls outside rental definition. Treated like a business! If average use is 30 days or less And there’s maid service, Activity is not a rental either. Treated like a business!
Average customer use is determined each tax year. Page 5 & 13
Regular, continuous and substantial work in operations! 7 tests in Reg. 1.469-5T(a) Most common: •Worked 500 hours •Did most of the work •Worked 100 hrs & no one more (If full-time employee, this test is N/A. Also it’s TP’s burden to prove employee hours.) Page 5 & 13
INDICATORS TP MAY NOT MATERIALLY PARTICIPATE:
•On-site manager of the activity •Commissions or management fees on Sch E •Activity is out-of-state •TP has a full-time job •TP is not involved on a regular basis
TIME NOT COUNTED •Investor-type activities Reg. 1.469-5T(f)
Studying and reading reports Analysis for TP’s own use (budget etc) Monitoring in a non-managerial capacity Preparing tax return Trips to bank, post office Reading journals and newspapers
•Work not ordinarily done by an owner Sewing drapes, washing windows, inflated time
•Time before TP owned activity Investigating buying a property
•Travel time
Page 5 & 13
Mordkin T.C. Memo 1996-187
Issue: Material participation in 2 condo rentals.
LAW • Average customer use 7 days or less. • Not a rental.
• Treated as a business. • TP must prove he materially participated.
Mordkin T.C. Memo 1996-187
TP: • President of Condo Association. • Chairman of two Boards. • Occupation: Attorney.
Mordkin T.C. Memo 1996-187
Court: •TP received no compensation from condo units. •Services must be integral to operations. •TP not on-site regularly. Held: •TP did not materially participate.
•Losses from condos are passive. •Losses not deductible without passive income.
•§ 6662 20% penalty appropriate!
FOR RENT!
Questions????
Mordkin
