8012 / Under the passive loss rules, when do rental activities constitute passive activities?

Except as provided below, a passive activity includes any rental activity, without regard to whether the taxpayer materially participates in the activity.¹ A rental activity is any activity where payments are principally for the use of tangible property.² However, there are a number of exceptions to this rule. An activity is not treated as a rental activity if: (1) the average rental period is less than eight days, (2) the average rental period is less than 31 days and substantial personal services are provided, (3) the rental of the property is incidental to the receipt of personal services or to a nonrental activity, (4) the taxpayer makes the property available on a nonexclusive basis during regular business hours, (5) the taxpayer rents property to a passthrough entity engaged in a nonrental activity, in his capacity as an owner of that entity, or (6) the personal use of a residence that is also rented out exceeds the greater of 14 days or 10 percent of the rental days (see Q ).³

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Planning Point: For purposes of the preceding paragraph, personal services include only services performed by individuals, and do not include services such as services to comply with local permit laws or performed in connection with the improvement or repair of the property. In determining whether personal services provided in connection with making property available for use by customers are significant, all of the relevant facts and circumstances are taken into account. Relevant facts and circumstances include the frequency with which such services are provided, the type and amount of labor required to perform such services, and the value of such services relative to the amount charged for the use of the property.⁴

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See Q for special rules for rental real estate.