STR active vs passive income - how is my short term rental income categorized for tax purposes?

Thanks for the detailed answer! So if I hire a property management company to handle most of the day-to-day operations but I still make all the decisions about pricing, improvements, etc. would that still count as active? Or would I fall below that material participation threshold?

If you've outsourced most of the day-to-day operations to a management company, you'd likely fall below the material participation threshold. The IRS looks at your actual time spent in managing and operating the rental activity. For your situation where you're making strategic decisions but not handling day-to-day operations, your STR income would typically be considered passive and reported on Schedule E. This means you wouldn't pay self-employment tax on the income, but you'll only be able to offset it against passive losses, not against your regular income (with limited exceptions).

Did it just tell you active vs passive or did it actually help with the tax forms? I'm using TurboTax but it keeps asking me questions I don't know how to answer about my beach house rental.

Sounds interesting but I'm skeptical. Couldn't you just call the IRS and ask them directly instead of using some website? I feel like they're the ultimate authority anyway.

The tool actually reviewed all my documentation and provided specific guidance on which forms to use based on my situation - Schedule C in my case since I met the material participation standard. It gave me a detailed report explaining why, with citations to IRS regulations. For your situation with the beach house, it would analyze your specific usage pattern and involvement level to determine the correct classification. The IRS regulations around STRs have nuances that many tax software programs don't fully address in their questionnaires.

How does this even work? I've called the IRS like 10 times and just get stuck in hold limbo. Do they just call for you or something?

Sounds like BS honestly. Nobody can get through to the IRS these days. I've tried for weeks about my audit situation. You probably just got lucky with timing or something.

They use technology that navigates the IRS phone system and holds your place in line. You only get connected when an actual agent picks up. It's not just calling for you - their system monitors the hold and navigates the prompts so you don't have to sit there for hours. The IRS actually does answer calls, but their volume is so high that most people give up after long wait times. With Claimyr, you go about your day and they alert you when an agent is actually on the line ready to talk. In my experience, it drastically cut down the time investment needed to get official clarification.

Wait seriously?? I have two cabins and have been lumping all my time together. How do you make that "special election" to treat them as one activity? Is there a specific form?

You need to file a statement with your tax return that specifically elects to group your rental properties as a single activity under the passive activity rules. This is done under Treasury Regulation 1.469-4 and should clearly identify all properties you're grouping together. The grouping needs to make economic sense - properties in the same geographic area or with similar management approaches work best. Once you group them, you generally can't regroup them in future years without IRS permission, so it's a decision you should make carefully, ideally with professional advice.

I did this last year! Only rented my cabin for 10 days during a local festival when rates were super high. Made about $4,800 tax free. But remember you can't deduct ANY expenses if you go this route - no cleaning, no maintenance, nothing. Do the math carefully - sometimes it's actually better to rent more days and take the deductions.

This is really helpful clarification, especially about the personal use vs rental days being separate from the active/passive determination! I've been conflating those two rules. Quick follow-up question - when you say "substantially all the work being done by you" for test #2, does that mean if I hire cleaners between guests but handle everything else myself (bookings, pricing, guest issues, maintenance scheduling), I could still qualify under that test? Or would hiring any services automatically disqualify me from the "substantially all" standard? I'm trying to figure out if I need to track my hours super precisely or if the nature of my involvement is clear enough on its own.

Great question about the "substantially all" test! Hiring cleaners typically won't disqualify you from meeting this standard as long as you're handling the core business operations yourself. The IRS recognizes that using service providers for routine tasks like cleaning is normal business practice. What matters more is who's doing the substantive management work - if you're handling bookings, pricing decisions, guest communications, marketing, maintenance coordination, and financial management, you're likely doing "substantially all" the meaningful work even with contracted cleaning services. However, I'd still recommend tracking your hours as backup documentation. Even if you qualify under the "substantially all" test, having hour logs provides additional evidence of material participation. Plus, if your involvement changes over time (like if you later hire a property manager), you'll want those records to support your classification in different tax years. The key is demonstrating that you're actively running the business, not just collecting passive rental income while others do the work.