Short-term rental not qualified for APRRE.

AuthorMoavero, James A.
PositionActive participation rental real estate

Letter Ruling (TAM) 9505002 presents a very interesting situation in which a rental activity was not considered rental real estate because of the short duration of the rental, and because the lack of significant services performed did not rise to the level of an active trade or business.

A husband and wife owned several weeks of use of a timeshare condominium in a resort location. They rented out the timeshare to third parties for some or all of the weeks available to them. The average rental period for the timeshare was seven days or less. Although some rentals may have been more than seven days in length, on average they were not. Through the payment of association dues, cleaning and maintenance of the condiominium unit was provided before and after renters came and left the condominium. Otherwise, no other services were provided. The IRS determined that there were no significant services provided to renters of this condominium.

The taxpayers filed their tax return, claiming a rental loss on Schedule E; because their adjusted gross income was less than $150,000, they claimed all or a portion of the rental loss as active participation rental real estate (APRRE) loss under Sec. 469(i). On audit, the Service disallowed the rental loss; the taxpayers then requested this ruling.

The IRS ruled that because the average rental period was seven days or less, under the regulations, this activity was not considered a rental activity at all. Temp. Regs. Sec. 1.469-1T(e)(3)(ii)(A) states that when the average rental period is seven days or less, the activity is not a rental activity; instead, it is treated as a trade or business. However, because no significant services are provided, the activity is treated as passive. Presumably, if towels, laundry service, room service or other such hotel/motel amenities were provided, these losses could be taken as active trade or business losses. The taxpayers in this case were required to show the income or loss from this activity on Schedule C, had to treat it as passive...

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