Active Or Passive Activity
I closed on a condo/hotel unit last year. Rentals average 7 days or less. There is on site managment in place and we split the rental income with them, expenses exceed income. In an earlier forum I read that the IRS says this an active income business rather that a passive rental activity. Any advice on how this should be reported for tax purposes?
If the property is in your own name (rather than a business entity) report your income and expenses on Schedule C (1040) and also complete Schedule SE (1040), just as any other active income business you operate as a sole proprietor.
I just or a education on this.
I am being audited, and despite have a "competent" CPA complete my return, I am having someone else do the audit.
He deciphered the IRS letter and a major challenge that they may make is holding them in an entity (albeit a single member LLC), and reporting on schedule C vs. E, and expensing rather than capitalizing my deductions.
In the one year it would make a -49K NOL turn into a 3K capital loss.
His software can handle it. Your accountant is treating this as a passive income activity rather than an active income activity. If he threw out the "audit" word so quickly, he probably knows he is taking an "aggressive" tax treatment that may invite an audit.
Tell the accountant that you want the condotel activity reported on Schedule C rather than Schedule E so that you are in full compliance with the tax code. Perhaps you can use a Schedule C operating loss on your 1040 to offset other ordinary income to much better advantage than a Schedule E suspended loss.[ Edited by NewKidInTown3 on Date 05/16/2008 ]
Thanks New Kid I believe it was your response from the original forum that give me my first info that the condo/hotel could be treated differently.
Quote:
On 2008-05-16 08:02, flzoni wrote:
Thanks New Kid I believe it was your response from the original forum that give me my first info that the condo/hotel could be treated differently.
It is not a question of "could" be, but rather "should" be. Tax code is pretty specific that your situation is an active income business. Active income activities are reported on Schedule C if operated as a sole proprietor.[ Edited by NewKidInTown3 on Date 05/16/2008 ]
The question has now come up about material participation. How is this handle for a situation like mine?
And why is material participation a question? Material participation does not change the tax treatment. You would still report your net income on Schedule C and Schedule SE.
The question came up because expenses are about twice the income recieved.