Rental Arbitrage - Taxes

[Eric P.]

For those following a STR rental arbitrage airbnb strategy (or homeaway or vrbo), in which you're airbnb-ing places that you've rented from someone else (with the owner's / landlord's permission, of course): do you report the income on Schedule C or Schedule E when filing your taxes? I know that most people who OWN a property and put it on airbnb claim the income on Schedule E ("passive income"), which avoids having to pay the 15.3% self-employment tax.

I'm wondering if those who are practicing rental arbitrage by renting the place that they list on airbnb also claim the income on Schedule E, or if you claim it on Schedule C bc you don't own the place that you're listing on airbnb.

Whether you own or rent the property that you list on Airbnb, the activities are the same: acquiring the property, furnishing it, activating utilities, listing it on Airbnb, hiring cleaning services, etc, etc. Thus since in both cases you as a short-term landlord are merely providing basic services to your short-term guests (and receiving passive income in return), I would think this meets the requirements for Schedule E and I would think that you can report the income on Schedule E even if you don't own the property, thus avoiding the 15.3% self-employment tax? Any thoughts?

[David Orr]

First, even an STR that isn't rental arbitrage may in some cases be reported on a Schedule C rather than a Schedule E depending on whether you provide "substantial service".

In the case of rental arbitrage, I believe the best and arguably only acceptable choice is Schedule C.  The rent you pay is an expense and it would go on line 20b ("Other business property"). 

Why Schedule C?  First, if you're generating a positive net income, the Schedule C is the safe choice because you're paying more tax (specifically the self-employment tax), so you can't be faulted for tax avoidance as you could be if you improperly use Schedule E.  Secondly, I think it's at best questionable if Schedule E can be used for rental income from a property you don't own.  I haven't found any guidance from the IRS that says that Schedule E can or can't be used for rental income from a property you don't own, but the Schedule E instructions and related guidance all seems to be based on the assumption that you own the property.  I don't think rental arbitrage was considered when the relevant tax law and guidance was written, so it may be an area of uncertainty.  And in that case it's best to err on the side of caution, and that would mean using Schedule C instead.