7 Days and 30 Days Rental Rules

Seven Days and Thirty Days Rental Rules 

Seven days rental rule allows real estate owners to claim the loss from the rental activates to offset the loss against other earned income. In simply put, If a property is rented for an average of 7 days or less then owners will be eligible for tax-deductible losses. 

For example if the property was rented for 132 days during the year and it was rented for 22 times. The average rental period will be 6 days. You are eligible to deduct the rental loss from your income. (Treas. Reg. Sec. 1.469-1T(e)(3)(ii)(A)). Likewise if it is rented for average period of 30 days or less and services are provided to the renters, rental income is active income. The rule says if it is rented for 7 days or less and in case of 30 days or less with substantial service, the activity is not a rental activity. 

It is worthwhile take note that it is a favorable provision of tax law for owner of vacation rentals. Generally the owner does not participate much on these types of rental properties and becomes passive loss, but since the average rental period is seven days or less, this loss can be active under the rule. Same benefits can also be taken when you rent your home on Airbnb and average rental period is 30 days or less and owner or n their behalf substantial services are provided to the renter (room service, etc) with certain exceptions and provisions. 

The rental income in these cases will go to Schedule C.  The loss becomes active loss and can be deducted from other income of the tax payer. There is one catch – in case of profit, the profit is subject to self-employment taxes at the rate of 15.3%. 

In all other cases unless you are a Real Estate Professional, most of the rental loss is passive loss and can only be deducted against passive income. If you have other passive income streams, that is good for you to offset other income source. Passive income can be from partnership or other businesses where you do not materially participate. 

You are eligible to take all the necessary deduction from the rental properties including following

Sec 179 Deduction and Bonus depreciation (write off of personal property associated with the property)

  • Property Taxes
  • Mortgage Insurance
  • Repairs
  • Improvements
  • Fees
  • Travel Expense
  • Insurance

Most of the time depreciation generates losses in case of Rental property. Cost segregation can help boosting up depreciation in the initial years to claim big losses to offset with other ineome.

 

 

 

Comments

  1. John PJanuary 28, 2023 at 7:48 AM

    Do I have to actively participate in this activity or can have invested (passive) on the property only?

    ReplyDelete
    Replies
    1. Jyoti Raj AdhikariFebruary 3, 2023 at 12:07 PM

      John, you have to participate in the activity to make to active. It is not considered as rental but should participate. Hope this helps you.

      Delete

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