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If you own a property that you rent out for an average of less than 7 days for the calendar year, you may not have to report it like a rental property, aka business.
It’s a tricky situation that requires careful evaluation of how often you rent the home throughout the year. You calculate it by taking the number of times you rent the home out and the total days you rented it out for the year.
For example, if you rented the home out for 100 days in a calendar year and it was rented 15 times. This is an average of 6.67 days, which is under the 7-day limit.
A property that’s rented for less than 7 days on average isn’t a rental property in the eyes of the IRS. Instead, it’s a commercial hotel ‘type property.’ You report earnings on Schedule C if you provide services connected to the property or if you don’t, you’ll report it on Schedule E.
No matter where you report it, if you have a loss (on paper), you can deduct it. But, there’s a catch.
You must prove you materially participate in the property. In other words, you must prove you and your spouse (if applicable) participate in the property’s upkeep, handling the rental, and even its renovations.
Your total participation hours combined (you and your spouse) must be 100 hours or more or at least more hours than anyone else puts into the property if you have others helping out with it.
How do you prove you work on the property?
Total up the hours you and your spouse participate in the handling of the property and the hours that anyone else, such as contractors spend on the property. If your hours are greater than anyone else’s, even if they don’t total 100 hours, you can take the loss.
If you have a profit, rather than a loss, you may be able to take a Section 199A deduction if you report the income on Schedule C as a business.
It sounds confusing and it can be, but we’re here for you every step of the way. We make it easy to determine when you can deduct the loss either because you materially participated in the business or for a Section 199A deduction. Feel free to call us 714-383-2307.