Rental Income Question

Is rental income always passive income?

I own a beach house in Florida that I rent out by the week. I advertise on the internet, I take all bookings, handle all the money, collect and pay sales tax, and do all of the maintaince and cleanup between guests or hire people to do it. It is hard to see how this is much different than actively running a business. In Florida there is a special business licensce for Beach Houses and we are treated differently from longer term rentals (read taxed more highly and regulated more stringently).

The reason I ask is that I show a loss for the rental business, but this year due to other income will have to suspend the loss if this is passive income

Any insight would be appreciated.

A “rental activity” is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. However, for purposes of this rule, your activity is not a “rental activity” if the average period of customer use of the property is 7 days or less.

However, if you “actively participated” in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. “Active participation” is a less stringent standard than material participation. For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense.

Therefore, if you qualify as a real estate professional or the average period of customer use is 7 days or less, the loss is not a passive activity and you can deduct the loss the same as any other business loss. If this is not the case, you can deduct up to $25,000 of the loss.

The rules and details are in IRS Publication 925, Passive Activity and AT-Risk Rules, which you can download for free at the IRS site at: http://www.irs.ustreas.gov/forms_pubs/index.html