IRS Audit: Short-Term Rentals

As a long-time subscriber, I understand that the taxpayer who owns a short-term rental (average rental period of seven days or less) is exempt from the requirement to qualify as a real estate professional for purposes of deducting his rental property losses on Schedule E.

The article Know These Tax Rules If Your Average Rental Is Seven Days or Less confirms my understanding.

‍

The IRS

I have a client who is undergoing an IRS audit and has a beach property that qualifies under the seven-days-or-less rental to deduct his losses.

The IRS examiner claims that my client fails the 750-hours test because he has a job and therefore he may not deduct his losses.

I know this is wrong. Do you have a citation that confirms my position that the 750-hours test does not apply to this beach property?

Answer

We do have such a citation. It’s Reg. Section 1.469-1T(e)(3)(ii)(A).

In the article Know These Tax Rules If Your Average Rental Is Seven Days or Less, you find more information.

Know This

An IRS examiner is not Mr. or Ms. “All Knowing.” Examiners, like all of us, are simply human. You cannot expect them to know all the rules, because frankly, there are way too many rules.

Because you are a tax professional, the client is under your protection. And you are doing the right thing by helping the IRS examiner get this correct so that your client benefits.

Bottom Line

Your client wins his seven-day rental loss deduction if he and/or his spouse materially participate in this beach rental as explained in Know These Tax Rules If Your Average Rental Is Seven Days or Less.

‍