Real estate is tricky and is usually treated much different than a typical business. This is just one Blog Post and Podcast Episode in an entire guide we put together on real estate taxes.

If you have not checked out our other content around real estate taxes, do so now by visiting: The Ultimate Guide to Real Estate Taxes

Here we are going to be talking about short term rentals and how the taxation of them may be different than your normal rental property.

Before we get started on that though, lets remember that if you rent your personal residence for 14 days or less throughout the year that is not taxable income to you. This is an excellent tax planning strategy that we utilize and discuss in another Blog and Podcast of ours, What Is The 14 Day Home Rental Strategy (aka The Augusta Rule)?

What Does The IRS Consider a Short Term Rental?

Generally stating, the IRS looks at a short term rental as one that has average rental days of 7 or less. This is an easy calculation.

Total Rental Days / # of Times Rented

For example, if you rented out your property 25 times during the year for a total of 150 days your average rental would be 6 days (150/25).

Is There Any Exceptions to a Short Term Rental If I Provide Substantial Services? 

Yes! If you provide "substantial services" and your average rental days are 30 days or less then it would qualify as a short term rental even though it is above 7 days.

Basically providing a "substantial service" means that you are treating it similar to a hotel. You are going above and beyond just a simple occupancy rental. Think of things like cleaning the unit during the stay, providing new sheets, making the beds, cleaning dishes, maid type services, tours or concierge services, meals, other "hotel" or bed and breakfast like services.

If all you are doing is cleaning common areas of the building, collecting trash, etc that would not be considered "substantial services".

What Is The Short Term Rental Loophole?

Just to reiterate, if your average rental is 7 days or less it qualifies as a short term rental. If your average rental is 30 days or less AND you provide substantial services it would also qualify as a short term rental. 

If you have a rental property that qualifies as a short term rental it potentially provides some great benefits. Even though it is a "rental property", since it is short-term the IRS does not classify it as rental activity and thus it is not considered passive. This means it is not subject to the passive loss rules and that you may be able to use short term rental losses to offset your regular income (W2, business, etc.)

In order to use a short term rental to offset non-passive income (W2, business, etc) you need to prove that you "materially participate" in the activity. To "materially participate" there are 7 tests you can meet but the most common we see are:

• You participated in the activity for more than 500 hours.
• Your participation was substantially all the participation in the activity of all individuals for the tax year, including non-owner participation.

• You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including non-owners) for the year.

Most rental activity loss you cannot apply against your regular ordinary income EXCEPT for short term rentals, as long as you materially participate. Be sure to factor this into your planning strategy.

Finally one thing to think about is that if you also use this property for personal use, other rules may come into play that you want to look into.

Again, this is just one Blog Post and Podcast Episode in an entire guide we put together on real estate taxes.

If you have not checked out our other content around real estate taxes, do so now by visiting: The Ultimate Guide to Real Estate Taxes

We also have a full section in our Tax Minimization Program specific to strategies around rental properties!