According to the IRS, not all rental property activity should be reported on Schedule E. If the property owner provides “substantial services” to short-term renters, the IRS says that the rental activity should be reported on Schedule C, and that the property owner must pay self-employment taxes on the income. If there is a loss, it can be fully deducted without regard for the passive loss limitation rules. Substantial services are defined by the IRS as: regular cleaning, changing linens, or maid services…furnishing of utilities or cleaning of public areas do not count as substantial services. For example, if you rent out a room in your house on Airbnb to short-term renters, the “substantial service” requirement can be satisfied if you are cleaning and changing linens after each short-term renter has left. This rule can apply to an entire property, or to a single room in a house.
For more information, you can review IRS Publication 527 by clicking here.