Exceptions to Passive Activity Loss Limitations

[j2kp0t]

Can someone please verify or correct my reading of this bit from page 3 of Pub 925?

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

My client rents a cottage out in increments of 7 days or less, which -- if I'm reading this correctly -- means that he can take a loss on this activity even though he would ordinarily be subject to the limits. Can this possibly be true?

If so, placing the loss on line 3b of the 8582 instead of line 1b, should do the trick -- I believe -- but I'm not very familiar with this form.

[thomtax]

I haven't had time to look up the research, but wanted to put out a thought to you. If he is renting out for these short periods of time, would it not fall into a business category like a motel/hotel rather than a rental property?

LT

[j2kp0t]

Well,

Certainly that is one way to look at it; however, it seems to me that if he were required to treat it as a non-rental business, then the Pub would say so -- instead, it seems to be saying that the rental is not passive income ONLY for the purposes of calculating the limit.

[thomtax]

Does the client provide linen, etc and then laundry it for the next customer, and possibly provide other services? I would think that the details of the situation would determine whether it is merely a rental or a business that he is in, possibly requiring SE.

[dsi]

Sounds like this is a Sch C trade/Business, and as such is not necessarily passive.

[j2kp0t]

If it were a Schedule C business, there would be no need to address an exception to passive activity loss limitations on the 8582 under the heading rental property -- I would think.

[thomtax]

I would agree with you.

LT

[dsi]

I agree also.

[New York Enrolled Agent]

If it were a Schedule C business, there would be no need to address an exception to passive activity loss limitations on the 8582 under the heading rental property -- I would think.

I think you need to understand that under Reg §1.469-1T(e)(3(ii)(A) there are exceptions to the definition of a rental. The "less than 7 days" use is one of the exceptions. Thus, the activity you describe is NOT a rental activity.

But, you are not done yet. NOW you must determine whether this non-rental activity is passive or active. That may be why you are finding the exception you refer to. You need to use the material participation rules to establish if this non-rental activity constitutes a passive or active activity. If the taxpayer has regular, continuous and substantial involvement in this activity then it a Schedule C item. If not, it is a non-rental passive activity. Am I making sense?

[Davc]

I think you need to understand that under Reg §1.469-1T(e)(3(ii)(A) there are exceptions to the definition of a rental. The "less than 7 days" use is one of the exceptions. Thus, the activity you describe is NOT a rental activity.

But, you are not done yet. NOW you must determine whether this non-rental activity is passive or active. That may be why you are finding the exception you refer to. You need to use the material participation rules to establish if this non-rental activity constitutes a passive or active activity. If the taxpayer has regular, continuous and substantial involvement in this activity then it a Schedule C item. If not, it is a non-rental passive activity. Am I making sense?

Even if passive, it's still schedule C.