Passive Activity Losses - Uncle Fed's Tax*Board

Exceptions:
1. a rental can be grouped with a business if insubstantial; or,
2. owned in the exact same percentage and rented back to that business
activity.
Vacation Rentals In a Nutshell
Many condos, vacation cottages, time-shares, hotels, motels, and bed and
breakfasts have an average rental period of seven days or less. As a result,
these activities are not defined as rentals [12] , but instead are treated as
businesses. Net losses from these activities are passive unless the taxpayer
materially participates. Because many of these activities have a management
company and may not be near to the taxpayer’s residence, materially
participating [13] may be difficult. See checksheet at end of chapter.
Sub-Issues
• Activities with an average rental period of 7 days or less are defined as
businesses, not rentals. Therefore, the active participation standard and
the $25,000 rental real estate allowance do not apply to these types of
activities. Losses, if passive, go on Form 8582 line 3b, not 1b.
• The personal use rules IRC § 280A take precedence over IRC § 469. If
the taxpayer or family members spent more than 14 days at the property,
losses generally are not allowed under the rules in IRC § 280A. The
losses do not enter into the passive activity computation and should not be
entered on Form 8582. [14]
Issue Identification
• Review Schedule E to determine the location of the activity.
• Inquire about personal use, including family members or those renting at
less than fair rental value.
• Determine whether a management company has been hired for the dayto-day
operations. Indicators: commissions or management fees
deducted.
• Review Schedule C for short-term rentals.
• Check the back of Schedule E for non-passive losses from hotels from
flow through entities. Does it make sense that the taxpayer materially
participated in the partnership or S Corporation business?
• Losses from businesses should be entered lines 3b, not 1b.
Material Participation Sub-Issue
Taxpayers sometimes attempt to qualify as a material participant in a vacation
rental under one of the following tests.
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