Trying to wrap my head around the requirements to take tax deductions against a car rental activity (e.g Turo) and how it would affect other (w2) income.

The IRS states "In general, rental activities, including rental real estate activities, are also passive activities even if you do materially participate." (https://www.irs.gov/taxtopics/tc425)

A different article mentions "You can only deduct your expenses from renting your car if you're self-employed." (https://www.thebalancemoney.com/car-rental-income-3193073)

So if I had a full time W2 job and a single member LLC where I rent cars (a business meant to make money and where I materially participate), would I be able to depreciate a vehicle and deduct maintenance, etc.., against business income and flow any potential losses over to my W2 income? Or are business expenses/depreciation only taken against business income, with a maximum loss equal to income?

1 Answer 1


Rental activities are passive, unless you materially participate in them. The definition of "materially participate" is given in the IRS Publication 925:

  1. You participated in the activity for more than 500 hours.
  2. Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
  3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
  4. The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities under Recharacterization of Passive Income, later.
  5. You materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
  6. The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
  7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.

If your activity doesn't qualify as active then you are subject to passive activity loss limitations, and may not be able to deduct the loss from the W2 income.

The second article alludes to all this by saying "you must be self-employed". Generally, if this is the only thing you do, it would be easier to show the 500 hours participation.

See the full IRS Publication 925 for details.

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