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1065 - Entering a Real Estate Business as Short-Term

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June 5, 2022
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A taxpayer has a 1065 in which they hold real estate and generate rental income.

The rental income is short-term in nature, thus they do not need to classify it as a passive activity when incurring losses.

https://www.hurdlr.com/deductions/airbnb-income-tax#:~:text=Passive%20involvement%20occurs%20when%20you,would%20be%20considered%20passively%20involved.

Regarding where to enter in ProConnect:

Are the buildings depreciated on a 27.5-year useful life?

How is the land portion of the building stripped out?

Where on the 1065 would it be indicated that this is "NOT" a passive activity?

ProConnect Tax

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Best answer by TaxGuyBill

@tccpg289 wrote:

The rental income is short-term in nature, thus they do not need to classify it as a passive activity when incurring losses.

Not necessarily. The short-term rental means it is not considered a "rental activity" for purposes of the Passive Loss rules.

So then you go to the 'usual' rules: Does the taxpayer Materially Participate? If yes, non-passive. If no, passive.

Then the next question is do they provide "services" to the tenants? The Regulation specifically mention maid service and meals as "services", but there could be other things that would be considered as services.

qbteachmt

Level 15

"Where on the 1065 would it be indicated that this is "NOT" a passive activity?"

I think you need to do more research.

"The rental income is short-term in nature, thus they do not need to classify it as a passive activity when incurring losses."

You seem to be confusing time and services provided. You need to know the operations.

Your own link would be used to understand this; click on the other formats, such as Real Estate Agent and Landlord. The passive or active determination is services provided and amount of work put into the operations. Not how long is each rental.

If I lease the house next door to use as AirBnB and hire a housekeeper to come take care of it all as needed, that is Passive.

If I rent out my guest house and manage all the work myself, that is Active.

They are both examples of short-term rental. The timeframe does not determine passive or active. Otherwise, you would tell us the running a hotel is Passive, since no one stays very long.

"Are the buildings depreciated on a 27.5-year useful life?"

It depends on the type of buildings: commercial, residential, storage units, etc.

"How is the land portion of the building stripped out?"

It would be valued separately from improvements and reported as its own asset value.

Don't yell at us; we're volunteers

T

tccpg289Author

Level 5

Thanks for the prompt response.

However, if you look at this chart, you can see that the length of a tenant does indeed dictate the categorization. I could be wrong, but just wanted to note:

https://www.hrblock.com/tax-center/wp-content/uploads/2018/05/airbnb-taxes.pdf

qbteachmt

Level 15

"However, if you look at this chart, you can see that the length of a tenant does indeed dictate the categorization."

Your title indicated you are dealing with Real Estate Business.

Of course, if you keep using AirBnB resources, everything will start with the assumption of short-term. You wanted to enter it as "short-term in nature, thus they do not need to classify it as a passive activity when incurring losses." But there is no indicator for "short term" other than Days Rented. You keep pointing to what will make this nonrental, on your way to determine passive or nonpassive.

"A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional." From: https://www.irs.gov/pub/irs-pdf/p925.pdf

You seem to be trying to use something along the lines of: "Under the Internal Revenue Code, the income generated by leasing your property is not considered a rental activity for a taxable year if the average period of customer use for such a property is 7 days or less." From: https://www.snydercohn.com/2021/12/is-your-short-term-rental-activity-really-a-rental-activity/

You already have this as a Business.

If you go to a surgeon, your medical issue is evaluated in the perspective of surgery. If you go to any short-term or AirBnB reference, your tax issue is evaluated in the perspective of short term rentals.

However, if you want to understand Passive or Nonpassive, especially from the perspective of Real Estate Professional and Form 1065, you probably should look at the IRS resources, as well as reference materials for that condition. Go to that IRS Pub, go the section for "Rental Activities" and read along. Follow the links to read about Exceptions, Activities that Aren't Passive Activities, and the part about Real Estate Professional. There is no entering that some activity is Short Term. You determine the type of activity, and enter it accordingly. In your case, you seem to be working on 1065, and a Schedule E. Notice those AirBnB resources don't even mention 1065.

Here is the ProConnect article:

https://proconnect.intuit.com/support/en-us/help-article/form-1099-misc/common-questions-entering-rental-royalty-property/L8vcb1Wbz_US_en_US

Don't yell at us; we're volunteers

T

TaxGuyBillAnswer

Level 15

@tccpg289 wrote:

The rental income is short-term in nature, thus they do not need to classify it as a passive activity when incurring losses.

Not necessarily. The short-term rental means it is not considered a "rental activity" for purposes of the Passive Loss rules.

So then you go to the 'usual' rules: Does the taxpayer Materially Participate? If yes, non-passive. If no, passive.

Then the next question is do they provide "services" to the tenants? The Regulation specifically mention maid service and meals as "services", but there could be other things that would be considered as services.