Are STRs & MTRs Considered Active Income? Do they need Separate LLCs from LTRs?

[Kiah McBride]

After having a consultation with a company that sets up LLCs, I'm now questioning if I truly have the right LLC formation for the purpose of my business. For context, I created one LLC to run a mix of STR and MTR properties. Right now, I have a tenant who originally was only supposed to be in one of my units for 6 months, but she recently extended her stay another 6 months. Due to the fact that it's a fully furnished rental that I intended to run as a MTR/STR, I've been funneling all of the costs for that rental under the LLC, including the renovations and upgrades of the home.

I also have another unit behind that first unit that I recently renovated from a detached garage to a studio apartment, and I've been renting it out on a website called Peerspace, for productions, photoshoots and small events. It will also eventually become a furnished MTR or STR, but as of now it's being used for the purpose described above. I've also been funneling those rental costs through the LLC.

For both of my units, I have been the only one managing every aspect of the renting process, from setting up listings to collecting rent, doing repairs, etc. The only thing I've contracted out thus far is the cleaning of the units. Also to note, that I have not filed taxes on the LLC yet, because I just officially started renting it out as an investment property in January 2023. In 2022 I was mostly doing repairs and renovations on the home and back unit (and living in the main home as my primary residence).

I was told by a CPA that legally a LTR is anything over 7 days, and anything under that is considered STR from a tax standpoint. I thought it was anything 12 months or longer, especially considering most lenders won't accept 6-month leases for rent purposes. So now I'm confused as to:

1) What exactly is considered a LTR from a tax/legal standpoint in terms of length of stay? 

2) Does an LTR require a completely separate LLC because it's passive income? What makes it passive vs active?

3) Are both MTRs and STRs considered active income, and thus need their own LLCs? Can they both be lumped under 1 LLC?

4) For sites like Peerspace where you're using your home to rent out for services for just a few hours, is that considered a STR or something completely different? If the latter, does it also need its own LLC?

5) If I want to add consultation services to the MTR/STR LLC (I'm getting a lot of requests for this), is that allowed or do I have to create a separate LLC for that too?

6) I had a cost-segregation done on this property in December 2022, is this included on my business taxes or my personal taxes?

I know this is a lot but I never seem to get clear answers and I'm trying to make sure I set everything up correctly before I make this any harder on myself come tax season. Thanks for any responses!

[Basit Siddiqi]

Why aren't you asking these questions to your CPA?

Technically, the IRS have a designation of 'LTR' or 'STR'

They just care that you are properly classifying whether the property is passive or active.
They also want to make sure that you are properly depreciating the property as residential real estate is depreciated over 27.5 years and other properties depreciated over 39 years. 

Depending on the average stay of your guests, your property may need to be depreciated over 39 years.

[Sean Morrison]

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

Most rental income is considered passive unless the average stay is less than 7 days (there are other things you can do to make it active though). Definitely talk to a CPA about how that works for you. 

Having said that, it is best practice to try to separate passive and active income streams. While it can technically be done under one LLC, it means very careful accounting practices so it's reported right. And with a renter in for 6 months, it sounds like you have probably had both active and passive income flowing through the same LLC for some time now.

The bigger question is what you mean by funneling costs and income through the LLC. The purpose of the LLC is to provide asset protection, but that only works if the LLC owns the property. Otherwise, it sounds like the LLC may be acting as a property manager, which changes everything.

[Michael Smythe]

Have always found it's best to get your LLC attorney and CPA together to hash all this out, otherwise they always seem to give conflicting info.

[Kiah McBride]

Quote from @Sean Morrison:

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

Most rental income is considered passive unless the average stay is less than 7 days (there are other things you can do to make it active though). Definitely talk to a CPA about how that works for you. 

Having said that, it is best practice to try to separate passive and active income streams. While it can technically be done under one LLC, it means very careful accounting practices so it's reported right. And with a renter in for 6 months, it sounds like you have probably had both active and passive income flowing through the same LLC for some time now.

The bigger question is what you mean by funneling costs and income through the LLC. The purpose of the LLC is to provide asset protection, but that only works if the LLC owns the property. Otherwise, it sounds like the LLC may be acting as a property manager, which changes everything.

Thank you for this explanation! It's definitely a bit confusing and I do think how I've been doing it the LLC is acting more as a property manager. The home (as of now) is not under a LLC. Still trying to understand how all of this works!

[Kiah McBride]

Quote from @Michael Smythe:

Have always found it's best to get your LLC attorney and CPA together to hash all this out, otherwise they always seem to give conflicting info.

 Yeah that's what's it's starting to sound like. Everyone seems to have different responses which is what makes it confusing!

[Kiah McBride]

Quote from @Basit Siddiqi:

Why aren't you asking these questions to your CPA?

Technically, the IRS have a designation of 'LTR' or 'STR'

They just care that you are properly classifying whether the property is passive or active.
They also want to make sure that you are properly depreciating the property as residential real estate is depreciated over 27.5 years and other properties depreciated over 39 years. 

Depending on the average stay of your guests, your property may need to be depreciated over 39 years.

Thank you for you response! I did ask the CPA I was working with at the time but never got a response regarding Peerspace so just trying to see if anyone could provide some clarity.