Use an accountant.

Anonymous wrote:You should expect to be audited.

We sold a rental property in OBX that we had bought at the height of the market in the early 2000s and sold about a decade later. We claimed a similarly sized loss, around $250k. They audited the F out of us. We had to provide receipts for every claimed expense down to the penny. It was a royal pain in the a$$ that cost us about $5k in accountant fees AND another $5k in disallowed deductions. So get ready.

We had never been audited before, and haven't been audited since.

Was this during the Obama administration? We got audited then to and never again , think they ramped up funding for the IRS back then and they were itching for work

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schedule c or schedule e
Do rental property owners file Schedule C or Schedule E?
By Joel Chamberlain
June 22, 2021
Business Growth, Business Tax, Individual Tax
Our recent blog addressed many of the tax issues inherent in renting your vacation home on Airbnb, VRBO, or another platform. Which form to file (Schedule C or Schedule E) with your tax return is a classic area of confusion for owners of short-term rentals, and the answer is often unclear for Airbnb hosts and other property owners navigating their first tax season with a vacation rental. It’s important to work with a tax professional who understands all the nuances of the law in this area to ensure you’re filing the right forms and also maintaining the required records.

First, here’s a brief explanation of the differences between the two forms.

Schedule C: Profit or Loss from Business
In general, when you are self-employed and actively work in your business, you report the income and deduct allowed expenses on Schedule C. You can think of it as income that you have to do something to earn. Income reported on Schedule C is subject to self-employment tax.

Schedule E: Supplemental Income and Loss
Typically, Schedule E is used to report passive income, including income from rental real estate. You do not deduct business expenses on Schedule E, as they are not considered allowable deductions. You are also subject to Passive Activity Loss Rules, which limit the amount of passive income that can be offset by losses.

If you’re thinking that your vacation rental requires a lot of “active” work for you to manage listings, find guests, and maintain the property, it may seem like Schedule C is the obvious choice. However, the IRS has a lot of specific rules for reporting short-term rental income and losses that don’t necessarily align to that simplified Schedule C vs. Schedule E explanation above. You’re also probably thinking that you will want to be able to deduct your expenses to offset your income (which will require filing Schedule C). But again, there are many nuances and it’s even possible that your rental income can be considered non-taxable.

Schedule C Requirements for Airbnb and VRBO Hosts
Generally, you will file Schedule C for your short-term vacation rental if:

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”
Schedule E Requirements for Airbnb and VRBO Hosts
Generally, you will file Schedule E for your short-term vacation rental if:

The average guest rents the property for more than 7 days and you don’t provide “substantial services”, or
The average guest stay is longer than 30 days

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Are you 100% sure you should be using schedule C instead of schedule E? Also, should you be capitalizing some of the improvements and depreciating?

some things were capitalized liked the buildings but everything else like repairs was not

Are you sure they were repairs and not improvements?

General Principle of Capitalization:
The IRS indicates what constitutes a real property capital improvement as follows:

Fixing a defect or design flaw
Creating an addition, physical enlargement or expansion
Creating an increase in capacity, productivity or efficiency
Rebuilding property after the end of its economic useful life
Replacing a major component or structural part of the property
Adapting property to a new or different use

I'm just trying to picture what would cost over $200K and NOT constitute an improvement vs repair.

Resurfacing decks, painting, refurnishing get the 100% first year

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Is this your only business? You don't have W2 income because if you do, you cannot deduct those expenses if you don't have rental income to offset it.

we have a small amount of income from the running airbnb and about 600k of w2 from our primary jobs

It does not sound like running Airbnbs is your primary business, so it should probably be reported on schedule E and subject to passive loss limitations. I would expect an audit if you're taking $220k in schedule C Losses against your W2 income.

That's wrong. Airbnbs are active and schedule c because of it being like a hotel you provide services like cleaning and actively manage. Long term rents are passive and schedule e.

Anonymous wrote:

Anonymous wrote:Are you 100% sure you should be using schedule C instead of schedule E? Also, should you be capitalizing some of the improvements and depreciating?

some things were capitalized liked the buildings but everything else like repairs was not

Are you sure they were repairs and not improvements?

General Principle of Capitalization:
The IRS indicates what constitutes a real property capital improvement as follows:

Fixing a defect or design flaw
Creating an addition, physical enlargement or expansion
Creating an increase in capacity, productivity or efficiency
Rebuilding property after the end of its economic useful life
Replacing a major component or structural part of the property
Adapting property to a new or different use

I'm just trying to picture what would cost over $200K and NOT constitute an improvement vs repair.

Anonymous wrote:

Anonymous wrote:Is this your only business? You don't have W2 income because if you do, you cannot deduct those expenses if you don't have rental income to offset it.

we have a small amount of income from the running airbnb and about 600k of w2 from our primary jobs

It does not sound like running Airbnbs is your primary business, so it should probably be reported on schedule E and subject to passive loss limitations. I would expect an audit if you're taking $220k in schedule C Losses against your W2 income.

Anonymous wrote:Is this your only business? You don't have W2 income because if you do, you cannot deduct those expenses if you don't have rental income to offset it.

we have a small amount of income from the running airbnb and about 600k of w2 from our primary jobs

Anonymous wrote:Are you 100% sure you should be using schedule C instead of schedule E? Also, should you be capitalizing some of the improvements and depreciating?

some things were capitalized liked the buildings but everything else like repairs was not

You should expect to be audited.

We sold a rental property in OBX that we had bought at the height of the market in the early 2000s and sold about a decade later. We claimed a similarly sized loss, around $250k. They audited the F out of us. We had to provide receipts for every claimed expense down to the penny. It was a royal pain in the a$$ that cost us about $5k in accountant fees AND another $5k in disallowed deductions. So get ready.

We had never been audited before, and haven't been audited since.

Anonymous wrote:I'd do it, but with that large of a deduction, I'd pay a CPA to make sure that I was doing it properly and had the proper documentation

Yes, this is what I’d do, also. I’d want to be very sure I was doing this correctly and would have a professional to go to bat for me if the IRS had any questions.

Are you 100% sure you should be using schedule C instead of schedule E? Also, should you be capitalizing some of the improvements and depreciating?

I'd do it, but with that large of a deduction, I'd pay a CPA to make sure that I was doing it properly and had the proper documentation

Is this your only business? You don't have W2 income because if you do, you cannot deduct those expenses if you don't have rental income to offset it.

We've operated a small Airbnb condo for the last 3 years and basically break even on taxes on our schedule c. Last year seeing rates were going up we bought 2 fixer upper properties that required over 200k worth of repairs and Internet etc , the properties were not rented until 2023 so it looks like massive loses.

Help me feel ok that we are deducting 220k from our taxes and not being paranoid for an audit. We have receipts down tithe exact dollar for all repairs, costs etc as it was on a different bank account. Should I just expect to be audited? Is that what most business owners end up getting when expanding and taking a loss?