Schedule E or Schedule C?

[Daniel A.]

We're a married couple that both work W-2 jobs (approx. $200k together in 2023). We launched our first STR last fall (2023). It was a new build, and we spent quite a bit of time and money to get it up and running for our first guests. We met all non-passive requirements and can provide proof to show that our projected annual materially-active involvement is at least 500 for 2023.

We met with our CPA and he brought to our attention that we had a loss of -$107k. He mentioned that if we filed as a Sch C, we'd get a refund of $17k. However, if we file Sch E, we'd owe $7k. We don't technically offer substantial services, so I think we'd take a risk by doing Sch C for the refund this year, especially if we end up switching to Sch E down the road. The only reason he brought it up is because it's such a huge swing...

Another CPA on IG informed me that this should be filed on Sch E and just show it's not a passive loss, and we should have the same amount of refund ($17k). We let our CPA know but haven't heard back on his thoughts yet.

Does anyone have any insight? Considering the amount of time and money we spent last year on this property, we thought it would pay off in some way... Thank you.

[Kory Reynolds]

Unless you provide substantial service (more hotel/motel like), the short term rental should be reported on Schedule E.  But you can still treat it as resulting in Ordinary Income even though it is reported on Schedule E, which lets you properly report in accordance with the tax results it seems you are shooting for under the tax return loophole.

If your CPA is looking at switching it between schedules to get that tax result...it sounds like they don't understand the reporting position fully and/or they just don't know how to use their own software to address it.

In summary, based on what you are describing for the situation, it should go on Schedule E, with what sounds like the resulting refund of $17k.