Short Term Rental – Schedule E or Schedule C?

You’re probably wondering if short term rentals are reported on Schedule C or Schedule E. Short term rentals are non-passive but at the same time it’s not subject to self-employment (SE) tax, right?

This blog post will clear up this question and let you know how to finally report short-term rentals.

Schedule E or schedule C?

Rental income goes on Schedule E or Schedule C depending on the amount of services provided to the tenant.

• As a general rule, report income and expenses associated with real estate rentals on Schedule E. If it is a short-term rental then you will select the option for reporting the activity as non-passive to push through any losses.
• If you provide “substantial services” for your tenants, like a hotel or traditional bed and breakfast, it is necessary to report your income and expenses on Schedule C.

Trailer Park Owner

If you’re an owner of a trailer park, and you provide trailer lots, facilities, and substantial services for your tenants, the rental income from it is subject to SE tax.

The IRS defines significant services to be those that are mainly for the tenants’ convenience and are go above-and-beyond the general maintenance of the property.

According to the IRS, some examples of services that are not typically provided for the tenants’ convenience include things like:

• supervising and maintaining a recreational hall,
• distributing a newsletter,
• running on premise laundry facilies, and
• assisting tenants with buying or selling their trailers.

Services typically provided to keep the lots in a good condition for tenant occupancy include things like offering:

• city sewerage,
• electrical connections, and
• roadway maintenance.

Hotels, Bed & Breakfast, and Boarding Houses

If you earn rental income and provide services to the occupants, that income may be subject to SE tax.

Usually, you’re considered to provide services for the occupants if the services are mainly for their convenience and not services that are typically included when renting rooms for occupancy only.

An example of a substantial service would be a maid service that offers things like towels and other everyday items. But substantial services don’t include stuff like providing heat and light, cleaning public areas, or collecting trash.

Airbnb and Other Short Term Rentals

Short-term rentals like Airbnb and other vacation properties are typically categorized as Schedule E rentals. However, these rentals can easily be considered Schedule C rentals, and therefore subject to SE tax, if substantial services are provided.

The IRS has recently issued Letter Ruling 202151005, which provides some interesting insights on how SE tax applies to certain rental income. Specifically, the IRS looked at two situations.

Situation 1

The taxpayer is an individual who owns and rents a fully furnished vacation property through an online rental marketplace. They provide everything needed for a comfortable stay, like linens, kitchen utensils, and daily maid services. They even offer extras like toiletries, Wi-Fi, and access to recreational equipment. To top it off, they include prepaid vouchers for ride-share services. On average, customers use the property for seven days, so it meets the definition of a short term rental.

Situation 2

Similar to situation 1, the individual owns and rents out a fully furnished room and bathroom in their home through an online rental platform. The people who stay there only have access to the common areas to come and go, but the kitchen and laundry room are off-limits. Oh, and the taxpayer also cleans the room and bathroom after each guest leaves. On average, guests stay for about a week, so it’s technically a short-term rental.

Can you guess which one is a Schedule E rental vs. a Schedule C rental? You guessed it, situation 1 is a Schedule C rental while situation 2 is a Schedule E rental. Because of the substantial services like the maid services, access to recreation equipment and vouchers for ride-share services, the Airbnb is subject to SE tax.

Final Thoughts on Short Term Rentals

In conclusion, it’s important to understand the tax implications of owning and renting out a short-term rentals. Managing rental properties can be challenging enough – stressing about tax forms should not be something you have to worry about.

In most cases, the rental income is not subject to SE tax. However, if you provide substantial services like maid services, access to recreation equipment, and other extras you may be subject to additional taxes.