The passive loss rules are strict for short-term rentals of real estate, meaning average rentals of seven days or less. A couple owned beachfront property that they rented out over the years for an average rental period of seven days or less. They paid a management company to get tenants, collect rents, clean and the like. The couple visited the property occasionally to buy supplies and to make repairs.
According to the Tax Court, the couple did not materially participate in the property and can’t deduct the losses. The couples claim that they devoted at least 100 hours a year to the activity and that their participation was more than anyone else’s, even the management firm’s, didn’t fly with the Court. (Lucero, TC Memo. 2020-136).
Renting through a management company doesn’t negate short-term stays. A real estate pro and his wife owned units at a resort in Colo., Mexico and Hawaii. They contracted with management firms to handle rentals of the units to guests. The average period of per-guest use was less than seven days. The IRS claimed the rentals were not a qualified rental activity because of the guests short-term stays. The couple argued that the management firms, and not the end users, were rental customers. After the couple lost in district court, they appealed, but to no avail. An appeals court said they are not involved in rental activities. They also didn’t materially participate, so the losses are disallowed (Eger, 9th Cir.).
The Kiplinger Tax Letter