Is your rental property income passive or active?

Range
Range Certified Financial Planner
Range Certified Financial Planner
December 29, 2023

Many of our members have investments in rental properties—both short and long-term. Which has led to a lot of questions about how these incomes qualify as taxable income. The answer is slightly complicated, and often depends on your risk tolerance.

Long-Term Rental Property

For long-term rentals, as a general rule, if you have a full time W2 job, it’s unlikely the IRS will consider your property income as active. In order for it to be active income (and therefore expenses can be deducted against your W-2 wages, you need to hit a threshold that will qualify you as a real estate professional. Do you spend at least 50% of your time managing your real estate? Or do you spend 750 hours per year?

If you do not hit these thresholds, your income falls into passive and should be on a Schedule E. If you file this income as active, and you're audited, the IRS may ask for proof that you're acting as a real estate professional, and from our experience these appeals are not often successful.

Short-Term Rentals

Short-term rentals are defined as rentals in two ways: short-term rentals with average stays less than 7 days, or rentals with stays less than 30 days—but these rentals provide hotel-like services or amenities. For these types of rentals, you DO NOT need to hit the real estate professional threshold, and the income can be declared as active income on a Schedule C. So if you’re AirBnb’ing it, it’s likely considered active income.

We’ve seen a lot more questions come in surrounding this, so stay tuned—or reach out to Range if you have a specific question.

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