Short-Term Rentals from Real Estate

CSEA's Tax Resource Specialist, Joe Calderaro, EA has shared a recent IRS Chief Counsel memorandum providing the agency’s viewpoint on the application of IRC §§ 469(c) and 1402(a)(1) to short-term rentals from real estate. The advice addresses two issues:

1. Whether the characterization of an activity as a “rental activity” under § 469(c)(2) determines whether the activity is “rentals from real estate” excluded from net earnings from self-employment (“NESE”) under § 1402(a)(1) for Self-Employment Contributions Act tax purposes.
   No, whether an activity is a “rental activity” under § 469(c)(2) is not determinative of whether the exclusion in § 1402(a)(1) applies.
2. In situations not involving a real estate dealer, when are rentals of living quarters considered “rentals from real estate” excluded from NESE under § 1402(a)(1)?
   In situations not involving a real estate dealer, net rental income from the rental of living quarters is considered “rentals from real estate” excluded from NESE when no services are rendered for the occupants. However, if services are rendered for the occupants and the services rendered (1) are not clearly required to maintain the space in a condition for occupancy, and (2) are of such a substantial nature that the compensation for these services can be said to constitute a material portion of the rent, then the net rental income received is not excluded under § 1402(a)(1) and is included in NESE.