Non Rental Activities are excluded from the Rental
Activity category, and are thus not subject to the
passive activity loss rules




Rental activities are generally treated as "passive" but the
following activities are excluded from the category of "rental
activity" and thus escape the grip of the passive activity loss rules.
The non rental activities are:
 
  1. The average period of customer use of the property is
    seven days or less.  Short term rental of vacation units,
    hotel, and motel rooms are not considered rental activities if
    the average period of customer use is seven days or less.
    You figure the average period of customer use by dividing
    the total number of days in all rental periods by the number
    of rentals during the tax year. 
     
  2. The average period of customer use of the property is more
    than seven days but is 30 days or less, and you provide
    significant personal services.  Significant personal services
    must be above and beyond the normal services associated with a
    rental; cleaning and maintaining the property, for example, are
    considered "normal services".
     
  3. Regardless of the average period of customer use, extraordinary
    personal services are provided to make the rental property
    available for customer use.  Services are extraordinary personal
    services if they are performed by individuals and the customers'
    use of property is incidental to their receipt of the services.  This
    applies to institutions providing hospital patients room and board.
     
  4. Rental is incidental to a non rental activity.  A rental of property is
    excluded from the rental activity category and considered a non
    rental activity is the property is held mainly for investment or for
    use in a business.  A rental is considered incidental to an
    investment activity if the principal purpose of holding the property
    is to realize gain from its appreciation and the gross rental income
    from the property for the year is less than 2% of the unadjusted
    basis or fair market value of the property, whichever is less.

    For example, Rex owns unimproved land with a fair market value
    of $350,000 and an unadjusted basis of $250,000.  He holds the
    land for the main purpose of realizing gain from its appreciation. 
    To help reduce the cost of holding the land, he leases it to "Todd
    Ranch" so that they can use the land for their cattle to graze on.
    This is done at an annual rate of $2,500.  The gross rental income
    of $2,500 is less than 2% of the lower of the fair market value or the
    unadjusted basis of the land.  The rental of the land is not a rental
    activity. 
     
  5. The property is generally allowed for the non-exclusive use of
    customers during fixed business hours.  An example would be a
    golf course.

 

The fact that these activities are treated as non rental activities does not
mean that the passive activity rules are inapplicable.  Income or loss
from these activities will still be treated as passive income or loss if you
fail to meet the material participation tests for businesses.  To learn more
about the material participation tests for businesses, click here.

To learn more about these exception please read IRS publication 8582.

 

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