Well, here's a piece of good news: As a vacation rental owner, you might be able to pick and choose the benefits of both while only using one form. Well, Schedule C is the form taxpayers have to fill out for active income businesses, while Schedule E is the one investors usually fill out for their passive income businesses.īy looking at the definition alone, you might not be too sure of what your Airbnb property would be classified as, as plenty of active work is involved for marketing and managing each investment and, at the same time, you are not receiving a salary or commission for your work but collecting rent (albeit short-term) instead. So, what form should short-term rental investors use when filing their tax returns, Schedule C or Schedule E? Now you can see where the grey zone lies when you're a short-term rental investor: You could be generating active income by providing substantial services (hospitality) while at the same time acting as a residential landlord by investing in a property and collecting the dividends each month. Residential landlords make passive income by both collecting the rent from their tenants and profiting from appreciation once the property is sold. On the other hand, having your real estate work classified as passive income implies that the money you are making comes mostly from dividends, interest, and yes, rental property.
House flippers and wholesalers who purchase a property with the aim of upgrading it and selling it in the short term also generate active income, as they provide substantial services by fixing properties and putting them back on the market. You can generate active income by either receiving a salary or commission, which is usually the case for real estate agents and investors who have built a business with employees and clients.
Non passive income professional#
In short, having your income classified as non-passive or active income implies that you are a real estate professional providing substantial services for a company you either own or work for.
Non passive income how to#
Here's how to report your rental income as a short-term rental investor in a way that will maximize profits in the long term! Like with all matters tax-related, we recommend enlisting the help of a tax professional to clear up any doubts and to ensure you submit your tax returns promptly and correctly - but that doesn't mean we don't have tips as seasoned investors to share with you to make the journey that much easier. The two forms are quite different from one another, so before you go ahead and start filing your first taxes as a real estate investor, it's best to understand whether your income can be classified as active income or passive income! New investors looking to report their short-term rental income in their first tax year will quickly come across two main forms: Schedule E (for passive income holders) and Schedule C (for reporting active income). While you'll find plenty of clear-cut information about how to file your taxes as a full-time landlord, there is a lot more confusion, both online and offline, when talking about short-term rentals and their tax liability.
Managing a short-term rental property and preparing for future investments is definitely no walk in the park, but when you add tax issues to the mix, the job of a short-term rental investor becomes even harder.