There is often confusion about where to report STR income. Should it go on Schedule E where you normally report most rental income, or is it a business that should be reported on Schedule C? This is one of the questions that even professional tax professionals like CPAs and EAs often get wrong. They often either put everything on Schedule E no matter what, or put all short-term rentals on Schedule C. Neither of these is the correct way to make that determination.
The determining factor in deciding which form your short-term rental income should go on depends on whether you are providing what is called “substantial services”. Substantial services refer to offerings beyond basic cleaning between tenants, such as daily cleaning, meals, or entertainment for guests during their stay. In that case, you are considered to be not just running a rental property, but an actual hotel-like business.
If you provide substantial services, then your income for the property must be reported on Schedule C. Otherwise, you should report the income on Schedule E.
Sources for this include IRS Tax Topic No. 414 which details when to use Schedule C for rentals, and IRS Letter Ruling 202151005 which details when self-employment tax is applicable to rentals (which is equivalent to choosing Schedule C vs. Schedule E).
See also our article on how to determine if you have to pay self-employment tax on rental income because the determination is the same, since which schedule you use is also what determines whether you have to pay self-employment tax.
Is it good or bad if my income for the short-term rental is reported on Schedule C?
If the rental is at a tax loss, it may reduce your tax bill if you have the rental on Schedule C because Schedule C losses can offset your other types of income (such as your job or business income). But if it’s a rental that doesn’t really belong on Schedule C, you may have to pay penalties and interest if you are audited by the IRS. The correct way to potentially make your short-term rental loss offset your regular income is to qualify for one of the exceptions. So only put it on Schedule C if you are really providing substantial services during guests’ stays.
If the rental has a taxable profit, reporting the income on Schedule E is more advantageous, as it exempts you from self-employment taxes that you would have to pay if its income reported on a Schedule C. But if you are providing substantial services during guests’ stays, then you may be required to put it on a Schedule C even if it means paying self-employment taxes on the income.
Be cautious if you’re considering switching between the two schedules each year based on income fluctuations. The IRS is aware of the advantages tied to income levels, so if you do make a switch, be prepared to document any actual changes in the services offered for the rental.
If I qualify for the “short-term rental loophole”, does my rental income go on Schedule C?
No (not unless you are providing substantial services during guests’ stays). The STR loophole refers to when rental income is considered non-passive (it can offset your W-2 or business income) if it’s a short term rental with an average stay of 7 days or less, and you materially participate (which is not the same test as actively participating, it involves specific logged hours of time). In that case, it is non-passive income, but it still goes on Schedule E. The difference is that it isn’t limited by the passive activity rules on form 8582. Most tax software has an option to specify that rental income is non-passive, and that’s how you tell the software to treat the tax loss differently in that situation.
This is just one of many choices involved in properly preparing your taxes for your rental property. If you want someone to do your taxes or just provide some guidance, please contact us for a free tax consultation.
