How can I make Schedule E to be non-passive income?

anguyen3010
anguyen3010 Member Posts: 2 Newcomer
in Filing my taxes

I have an airbnb rental. My average rental days is less than 7 days and I actively participated in the business. I read up on airbnb reporting guidance that I should report my rental activities on Schedule E. However, when I use schedule E in FreeTaxUSA, it's default to be passive income. What do I need to do to make it non-passive?

Answers

  • Henry
    Henry FreeTaxUSA Agent Posts: 118
    edited April 21

    Hi anguyen3010! It sounds like your Airbnb keeps you pretty busy.

    According to the IRS, rental income is generally considered passive income, even if you materially participate, unless you are a qualified real estate professional.

    However, if the property was rented for an average of 7 days or less per guest, the rental isn’t a passive rental activity, and it should be reported on Schedule C instead.

    Check out this great article in the Community for more information.

  • Phaser
    Phaser Member Posts: 2 Newcomer
    edited April 21

    I respectfully disagree with the answer provided by Henry. This topic has been well researched by various tax professionals and attorneys. It's accepted by pretty much everybody that if the rental activity is for short-term rental (under 7 days) and if the partnership member is materially participating in the business, Schedule E losses are considered active and can be used to offset other active income such as W2 wages.

    Here is the actual copy and paste from Publication 925.

    "Exceptions. Your activity isn’t a rental activity if any of the following apply.
    1. The average period of customer use of the property is 7 days or less."

    I like FreeTaxUSA, but if it keeps this mistake unfixed, I will have no choice but to go back to another tax service. Please, FreeTaxUSA, please get your tax experts to review this and fix the software!!!

  • anguyen3010
    anguyen3010 Member Posts: 2 Newcomer

    Hi @Phaser, I am glad to hear that my understanding of rental income being non-passive is not completely incorrect.

  • Phaser
    Phaser Member Posts: 2 Newcomer
    edited April 21

    @anguyen3010, unfortunately my opinion and your opinion don't mean anything.

    I am in the same boat as you were last year — I need to take the rental loss (through material participation) to offset my W2 income, but FreeTaxUSA's software doesn't allow that.

    By the way, FYI, you used the phrase "actively participated" in your post last year. Active Participation and Material Participation are 2 different definitions and lead to different tax treatment. Active Participation is easier to be eligible for, but it gives you a cap on how much passive loss can be used to offset against active income. That amount decreases if your AGI is above $100k and disappears if AGI is above $150k. Material Participation has a higher bar to meet, but if you meet it, there is no AGI threshold.

  • Diabeetus
    Diabeetus Member Posts: 1 Newcomer
    edited April 21

    I have the same issue as Phaser and anguyen3010. With a STR and stays less than 7 days on average, I want to select Schedule E losses as active.

    @Phaser Perhaps one could simply mark themselves as a "real estate professional", so it switches from passive to active? However, in my case, I have two rental properties and do not want them both toggled to active as just one of them is an applicable STR…

  • ana
    ana Member Posts: 1 Newcomer

    I am running into this same issue. I have a schedule E with 2 passive long term rentals and 1 active short term rental, but all are counted as passive by freetaxusa. Any suggestions on what to do? Is using other software really the only way?

  • BosProps4121
    BosProps4121 Member Posts: 2 Newcomer
    edited April 21

    Did anyone figure out a way to fix this? I am surprised to see my STR expenses allow for almost no deductions despite my material participation. I don't want to incorrectly report my status as "real estate professional" but doing so reduces my tax liability by around $20k. I would not be investing my time and money into short-term rentals if it were not for the tax benefits and passthrough deductions. I'm about 80% done with filing my taxes through freetaxusa, it would be a shame to start over in another software.

  • Henry
    Henry FreeTaxUSA Agent Posts: 118
    https://community.freetaxusa.com/discussion/comment/4317#Comment_4317

    You're right, Phaser. Short-term rentals are getting to be more and more common, and the IRS has provided better guidance on how this type of income should be reported.

    If the property was rented for an average of 7 days or less per guest, the rental isn’t a passive rental activity, and it should be reported on Schedule C instead.

    I have updated my previous answer to reflect this information. I appreciate your feedback!

Categories