Rental activity income is generally reported on Schedule E (individuals) or Form 8825 (Partnerships) for federal income tax purposes. In recent years, as short-term rentals are on the rise, proper reporting of rental income has generated questions for which conflicting guidance is often the result.

In general, Schedule E or Form 8825 remains the proper form for reporting short-term rental activity. This includes portions of a personal residence and separate properties owned exclusively for rental. This approach also continues to treat rental income as passive, which is subject to loss limitations (more on this later).

Only when “substantial services in conjunction with the property” (IRS Publication 527) are provided is the passive approach inappropriate. “Substantial services” create a presumption that the activity is a trade or business subject to self-employment tax.

What are “substantial services?” This is likely where most contradictory advice originates. The answer turns on the extent of services offered to the guest. Is your guest experience similar to a hotel or is the guest responsible for looking after themselves? It is understood that cleaning occurs after checkout. However, when maid service, laundry, changing linens, etc. is provided during the guest’s stay, the activity is no longer passive. If the guest must perform these services for themselves, the activity is passive.

Expect that this topic will arise during an audit, so confirming whether the activity is passive or active is important to avoid penalties and interest.

On the local level, short-term rental activity likely triggers occupancy taxes, the same type of taxes hotels pay. Although the booking platform may pay these taxes for you, the property owner is ultimately responsible for ensuring that the taxes are paid.

Even if the activity is passive, “real estate professionals” are not subject to passive loss limitations. This is a person who spends at least 750 hours, representing at least half of all personal services, annually in the real estate activity.

An individual employed full-time fails the personal services test. The most common qualifiers for real estate professional status are an individual who has multiple properties and spends the majority of the year working in that activity as the primary source of income, or a non-working spouse investing time in the real estate activity while the other spouse works. A written time log and mileage log are required to substantiate real estate professional status.