Passive Loss Rules Short Term Rentals

Under the passive activity rules you can deduct up to 25 000 in passive losses against your ordinary income w 2 wages if your modified adjusted gross income magi is 100 000 or less.

Passive loss rules short term rentals. The passive activity loss rules were enacted in the late 1980s in response to the perception that wealthy taxpayers were using real estate to produce artificial tax losses. Passive activity loss rules are generally applied at the individual level but they also extend to virtually all businesses and rental activity in various reporting entities except c corporations. Cpa tax practitioners who have clients involved in a real estate rental trade or business are no doubt aware of the rule allowing 25 000 of passive losses from rental real estate to be deducted against nonpassive income and the 750 hour material participation rule for qualifying as a real estate professional under the passive activity loss rules. For losses to be currently deductible on such short term rentals the taxpayer s hours of participation in the activity must meet the material participation requirements.

From their personal records the barniskis documented more than 100 hours of activity related to the property which they claimed exceeded the time spent by any other. In short your rental losses will be useless without offsetting passive income. Real estate professionals who own short term rental properties that are managed by a third party may find it more difficult to escape the grasp of the passive loss rules. Passive losses can be written off only against passive gains.

Exceptions to passive loss rules. Your income is small enough that you can use the 25 000 annual rental loss allowance. This deduction phases out 1 for every 2 of magi above 100 000 until 150 000 when it is completely phased out. A recent decision of the ninth circuit court of appeals contains bad news for owners who pay others to manage their short term rentals of vacation homes time shares and.

The passive activity loss rules. The question for the court is whether short term rentals such as airbnb rentals can be grouped with other long term rental properties. You or your spouse qualify as a real estate professional or. There are only two exceptions to the passive loss pal rules.