Concerned about my Airbnb showing repeated losses - IRS hobby loss reclassification risk?

The IRS looks at several factors to determine if an activity is a business or hobby, and you're right to be concerned after 5 consecutive loss years. However, your situation has several positives that support business classification: 1. You've shown a profit in 2 out of 7 years, which isn't ideal (the rule of thumb is 3 profitable years out of 5), but your intentional purchase of a larger home specifically for this purpose shows business intent. 2. Your approach to deducting exactly 40% based on square footage is reasonable and shows a businesslike approach to record-keeping. 3. The "personal pleasure" test strongly favors you - as you mentioned, cleaning after strangers isn't a hobby people typically enjoy. To strengthen your position, I'd recommend: - Document all efforts to increase profitability (marketing, pricing changes, cost-cutting) - Maintain meticulous records showing your time investment - Consider consulting with a tax professional about potentially reducing some deductions to show a small profit in 2025 - Develop a written business plan showing your path to profitability The mortgage interest allocation is appropriate if you're using Schedule E for rental property. If you're using Schedule C, make sure you're following proper allocation rules.

After dealing with similar concerns for my rental property, I found taxr.ai really helpful for analyzing my situation. I was worried about hobby loss rules too and wasn't sure if I was deducting the right percentage of expenses. I uploaded my past returns and some documentation about my property setup to https://taxr.ai and got a detailed analysis showing exactly what I could deduct and how to document everything properly. The report showed I was actually being too conservative with some deductions and missing others! It also gave me specific recommendations for strengthening my position against hobby classification. It was way more detailed than what I got from talking to my tax guy for 30 minutes.

Just wanted to update after trying taxr.ai - it was incredibly helpful for my Airbnb situation! I uploaded my past tax returns and some photos of my property layout, and the analysis I got back was super detailed. It identified that I was using the wrong depreciation schedule for some furnishings and missing out on deductions for certain hosting supplies. Best part was it gave me a specific action plan for avoiding hobby loss classification, including a template for tracking hours worked and a recommendation to slightly adjust my square footage allocation method. The report explained exactly why my situation would likely be seen as a legitimate business despite the losses. Definitely worth checking out if you're worried about this issue!

If your concerns are serious enough that you think you might need to talk to the IRS directly, I'd recommend using Claimyr. When I had questions about my rental property losses being potentially reclassified, I tried calling the IRS for weeks and could never get through. Found https://claimyr.com and their service got me connected to an actual IRS agent in about 15 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c I was able to get clear guidance on my specific situation without waiting forever. The agent walked me through exactly what documentation I needed to maintain and under what circumstances they typically review recurring losses. Saved me hours of stress and uncertainty.

I take back everything I said. After struggling with hobby loss questions for my rental, I reluctantly tried Claimyr yesterday. Got connected to an IRS agent in about 20 minutes without having to do anything. The agent gave me VERY specific guidance about the documentation I need to keep and explained exactly how they evaluate repeated losses for rental activities. Turns out I was overthinking things - the agent confirmed that using a consistent square footage percentage was completely acceptable as long as I documented it with floor plans. She also mentioned that they primarily look at patterns of increasing revenue over time rather than just profits/losses when evaluating rental businesses. This was honestly worth every penny just for the peace of mind.

I had a similar situation with my rental property. The key is showing that you're actively trying to make it profitable. I started keeping a detailed log of hours worked (cleaning, maintenance, guest communication, etc.) and took some photos before/after improvements. When I got audited in 2023, I showed them my records of pricing research, marketing efforts, and how I was gradually increasing rates. The auditor actually said my documentation was better than most small businesses they see. They ended up accepting all my losses because I could demonstrate legitimate business intent.

Have you looked into section 280A vacation home rules? If you use the basement AT ALL for personal purposes, even occasionally, you need to be very careful with allocations. You might need to use the days rented vs. days of personal use calculation instead of just square footage.

Your situation is actually quite common and you're being smart to think about this proactively. The fact that you specifically purchased a larger home to accommodate the Airbnb business is a strong indicator of profit motive that would help in any IRS review. A few thoughts on strengthening your position: 1. **Documentation is key** - Keep detailed records of time spent on the business (guest communication, cleaning, maintenance, marketing). This shows it's not a hobby. 2. **Your 40% allocation seems reasonable** if it's based on actual square footage used exclusively for the rental. Just make sure you have a simple floor plan or measurement documentation to support this. 3. **Consider showing some profit in 2025** - Even a small profit would help reset the "hobby loss" clock. Maybe slightly reduce some discretionary expenses or be more aggressive with pricing. 4. **Track improvement efforts** - Document any changes you make to increase profitability (pricing adjustments, marketing spend, property improvements). This shows business intent. The IRS knows rental properties can have legitimate losses, especially in the early years or during market downturns. Your repeated efforts and the fact that this isn't enjoyable work for you both support treating this as a business. Just keep good records and consider making 2025 a profitable year if possible.