What is a Non Rental Activity
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
- 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.