What this line means
The numeric code identifying what kind of rental property you own. The IRS uses eight codes: 1 (Single Family Residence), 2 (Multi-Family Residence), 3 (Vacation/Short-Term Rental), 4 (Commercial), 5 (Land), 6 (Royalties), 7 (Self-Rental), 8 (Other). Enter the code on line 1b for each property listed on line 1a. The code you choose affects which expense rules and loss limitation rules apply.
Does this apply to you?
- You own a house, condo, or townhome that you rent to tenants
- You own a duplex or apartment building with rental units
- You list a property on Airbnb, Vrbo, or another short-term rental platform
- You lease commercial space to a business
- You receive royalty payments from mineral rights, oil, gas, or intellectual property
Easy to overlook
Short-term rentals require code 3, not code 1 If your average rental period is 7 days or fewer, the property is a short-term rental (code 3) regardless of whether it is a single-family home. This classification matters because short-term rentals with significant personal services are treated as an active trade or business, not passive rental activity. Misclassifying a short-term rental as code 1 masks this distinction and leads to incorrect passive activity treatment on Form 8582. 1 IRS Schedule E instructions — Line 1b property type codes
Self-rental to your own business requires code 7 If you rent property to a business you materially participate in — such as renting an office building to your S corporation — the income is recharacterized as nonpassive regardless of your involvement in the rental itself. Code 7 flags this arrangement. Using code 1 or 4 instead hides the recharacterization requirement and understates nonpassive income. 2 General filing pattern — misclassified short-term rentals
Watch out for this
Listing a vacation home you also use personally as code 1 (Single Family Residence) instead of code 3 (Vacation/Short-Term Rental). If you rent the property for fewer than 15 days during the year, you do not report the rental income at all — but you also cannot deduct rental expenses. Personal use days on line 2 interact directly with the property type to determine deductibility.
Footnotes
-
IRS Schedule E (Form 1040) Instructions, Line 1b Property Type Codes. https://www.irs.gov/instructions/i1040se ↩
-
IRS Publication 925, Passive Activity and At-Risk Rules, Self-Rental Rule. https://www.irs.gov/pub/irs-pdf/p925.pdf ↩