I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
Tax Elections for Multiple Short-term Rentals: π Details Matter
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If you own multiple short-term rentals (STRs), π‘π you need to Ctrl+F in your 1040 for your "grouping election" or "469." This lets you combine these properties into one activity so your hours count together for material participation. And by qualifying for material participation, you can use those losses against your other income. π The problem is there are two different elections, and a lot of tax pros file the wrong one (if they file one at all). The ChoicesThe two elections are Reg. 1.469-9(g) and Reg. 1.469-4. βοΈ Same section in the code, but they do very different things. Using the wrong one can mess up your material participation position if the IRS ever audits you. Reg. 1.469-9(g) is for grouping rental activities. Think long-term rentals and mid-term rentals where you're not providing "hotel-type services." π This is the REPS grouping election, and it only applies to properties that the tax code considers "rental activities." Reg. 1.469-4 is for grouping activities that are NOT rental activities. That includes hotel-like operations, short-term rentals that qualify for the loophole, ποΈ and mid-term rentals where you provide substantial personal services. These are treated more like businesses even though they still show up on Schedule E. Which Way Western Man?So which election do your properties fall under? It depends on two things:
π If your average guest stay is over 30 days and you don't provide personal services, that's a traditional rental. It's a rental activity, and you group it under 1.469-9(g). π π If your average guest stay is between 8 and 30 days with no personal services, that's still a rental activity. Same election. Still 1.469-9(g). π π If your average guest stay is 7 days or less and you don't provide personal services, the IRS does not consider that a rental activity. That's your STR loophole property. You group it under 1.469-4. π π If you provide substantial personal services at any stay length, the IRS treats it like a hotel. Daily or mid-stay linen changes, concierge, transportation, on-site fitness or spa all count as "personal services". That's also grouped under 1.469-4. π Here's a quick reference: The rule is simple ("simple" π€£). If the IRS considers it a rental activity, you use 1.469-9(g). If the IRS does not consider it a rental activity, you use 1.469-4. For ExampleLet's say you run a bed and breakfast π₯ and you also have an Airbnb π΄ with a 5-day average guest stay. The B&B is hotel-like because of the services you provide. The Airbnb qualifies for the loophole because the average stay is under 7 days. Neither one is a rental activity. π ββοΈ That means you can group them together under 1.469-4 as a single activity. Your hours from both properties get combined, which makes it a lot easier to hit the 500-hour material participation test (thereby to use those losses). But Wait, There's MoreBefore you start grouping everything together, β the IRS does have rules about what counts as an "appropriate economic unit" (basically what makes properties eligible to group together). Under Treas. Reg. 1.469-4(c), they look at five factors:
You don't need all five. You just need a reasonable case. π Two STRs you manage yourself in the same city? That's easy. An Airbnb in Arizona and a B&B in Vermont with totally different management? π₯ That's going to be a tougher argument. The geographic factor is probably a little outdated. The real question is whether you can realistically manage these properties as one operation. The TakeawayIf your STR loophole properties are grouped under 1.469-9(g), you likely filed the wrong election. Those properties are not rental activities, so they belong under 1.469-4. Now, you'd need to get a pretty sharp IRS auditor to pick up on that - but it's real exposure. Happy searching! π Have a safe Mardi Gras, everyone! π π«‘ Meme Cleanser π§Ό
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I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
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