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  • 1.  Rental Property Tax Scenarios

    Posted 03-30-2023 12:40 PM
    Edited by Matthew R Savello 03-30-2023 12:42 PM

    Hi All, 

    I have a couple of scenarios regarding a client with a rental property that I am not all that familiar with. There are a couple of different situations to dissect so bear with me:

    Background: I have a client who had moved to the Bahamas back in 2021 for work, and had since rented out her former primary residence located in Alexandria, VA (historical district) to a singular tenant. The mother owns the home and she has a son who is in college who "managed" the property for her in 2022 - he collected the rent, does maintenance on the property, etc. While this son collected all of the tenant's income for his mother, the mother let the son keep all the rental income and never sees a dime of the rental income. The son was listed as the property manager on the lease.

    Starting in 2023, she began doing short term rentals via Airbnb since prior tenant moved out October 2022. She renovated the property after the tenant moved out. And started airbnb in January of this year.

    Q: What options do I have regarding this and what is the proper way to handle this situation for both 2022 and 2023? 

    2022 - Would it be all income of Sch E with a discretionary mgmt fee and the rest as a "gift" or can the son somehow claim the rental income on his return or have the mother claim full rental income and expense all of it out to the son? 

    2023 - I know short-term rentals can be reported on Sch C if 1) the average guest rents the property for fewer than 7 days, or the average guest stay is fewer than 30 days AND you provide guests with "substantial services." I have seen guidance indicate that Airbnb is generally included on Sch C and reported as self employment income, but being that this is passive activity and she is not a real estate professional and lives in another country, would it be reported on Sch E or keep on Sch C and check no for material participation?

    Thanks in advance!



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    Matthew R. Savello CPA
    Prestige Tax & Accounting, LLC
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    Matthew Savello CPA
    PRESTIGE TAX & ACCOUNTING, LLC
    COMMACK NY
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  • 2.  RE: Rental Property Tax Scenarios

    Posted 03-31-2023 01:02 PM

    Hi Matthew,

     

    Regarding AirBnB portion of your question, if you look at the instructions for form 8582 for 2022 (page 3):

     

    I think the treatment is schedule E ("Significant personal services include only services performed by individuals.  To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for us of the property."  If it's simply providing regular cleaning and maintenance services, that does not seem to meet the standard of significant personal services.).

     

    The activity is by definition not a rental activity if the average period of customer use is 7 days or less...

     

    Reporting: is not a rental activity, is a trade or business presumably, did not materially participate presumably but did actively participate (lower standard), then it's reported on Schedule E and losses on 8582 Part V.

     

    I had a client who rented out to a tenant for several years but in the middle of 2022 the tenant moved out and they converted it to an AirBnB.  I listed the 2 activities separately on the schedule E.  The first qualified for the special allowance for rental real-estate activities with active participation, the second did not since by definition it's not a rental activity.

     

    Mary

     

     

    Beschrijving: logoprint MSH CPA logo only

     

    Beschrijving: logoprint ball only

    Mary Sherman, CPA, CGMA

    Hicksville, NY 11801

    Tel: (516) 433-3734

    Email: msh@maryshermancpa.com

    Web: www.maryshermancpa.com

     

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  • 3.  RE: Rental Property Tax Scenarios

    Silver Most Valuable Member
    Posted 04-01-2023 12:59 PM

    If your issue is SE Tax, look at CCA 202151005 for application of SE Tax for residential rentals and BoBo v Commissioner 70 T.C. 706.  They provide a good discussion of the factors and rules.



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    Robert Barnett
    CPA, ESQ.
    Capell Barnett Matalon & Schoenfeld LLP
    Syosset NY
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  • 4.  RE: Rental Property Tax Scenarios

    Posted 04-01-2023 01:40 PM
    Hi Mathew,

    I see accountants too quickly make decisions on sch c versus Sch E property that is detrimental to the client. I'd encourage you to look into what "substantial services" are-it's not material participation of the owner. It's things like offering daily housekeeping at the home, concierge services, etc and evaluating if this would be a great tax strategy to try to or (maybe they already do) qualify for! I'm moving this discussion into my Facebook group as I think many people could use some assistance with this newer law. Facebook group is "advanced tax strategies".

    Careful evaluating could mean thousands of dollars difference every year for this client. If feeling rushed, revisit post 4/15 with the client. Below is a free cpe I did on showing the roi and value pricing that could also help. Best!!!


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The opinions expressed are the views of the author alone and should not be attributed to any other individual or entity and shall not constitute an accounting opinion.