LLC owning and running STR at net loss for 3 years, does it classify as a hobby?

[NA Zhu]

Hi, I am new to STR market, and I plan to get into this business after learning all the benefits it comes with.

We all know how STR (for 7 days or less lease) can be great for depreciation tax deduction, as it counts as an active income/loss, while the property value is appreciated.

From my understanding, the IRS states if a business is running at a loss for 3 years in the last 5 tax years, then it will be classified as a hobby, and I assume with that a huge tax bill will be on the way.

My question is, if people are using LLC to run STR at a loss for depreciation deduction for 3/5 and more tax years, wouldn't IRS just consider it as a hobby? Since with the depreciation of the property, the STR is unlikely to have net income and it would always be losing money on paper.

I plan to getting into the STR market once the mortgage rate gets a bit better, I wish to learn as much as I can while waiting for it. Any info would be appreciated, thanks!

[Linda Weygant]

You're confusing a business with an investment.

Businesses are reported on Schedule C (or in an entity structure) and are classified as Non Passive, Ordinary Income.  This is where the hobby loss rules come into play.

Rentals are reported on Schedule E (or in an entity structure) and are classified as Passive Income.  No hobby loss rules apply.