TurboTax Online currently doesn’t yet have a way to correctly report short-term rentals as non-passive. But you can with the desktop version of TurboTax, but they don’t make it easy. You have to go into the forms mode first. Then, look for the Schedule E worksheet for the rental, and check the boxes “G – Other passive exceptions” and “D – Material Participation”. That will make TurboTax bypass form 8582 for that rental, which is how the STR loophole is applied to a tax return.
Note that some people try to utilize the STR loophole by putting their STR on Schedule C, but that is not the correct way to do it. Rentals, including short-term, almost always go on Schedule E. The only exception would be if you offered something called substantial services, which would be if you did things like offered cleanings during guest stays (not just between stays, but during their stay), or if it was more like an actual bed and breakfast where you serve them meals, or provide entertainment. those are the only kind of situations where a rental goes on Schedule C. Instead, the correct process is to keep it on Schedule E, but indicate to the tax software that it should bypass form 8582.
In the video below, I explain the process of using the STR loophole with TurboTax in detail. I also explain how to correctly setup depreciation in TurboTax for short term rentals.
