Renting Recreational Equipment Alongside Your Rental Property

By Jason Watson, CPA
Posted Sunday, August 31, 2025

Let’s say you have a short-term rental but you want to make a little extra coin on the side, so you decide to rent jet skis, kayaks and other water craft. Perhaps some bicycles or golf cart. The questions we need answer are-

• Do you have a separate LLC for this activity to help maintain compartmentalization away from the rental property?
• Do you report these activities on Schedule C like a normal business, or on Schedule E (or Form 8825) alongside the rental property? What about Schedule 1 Line 8l?
• Assuming Schedule E reporting, do you group the activities together to not have the equipment rental activity be limited by passive activity loss limits?

Separate Activity For Recreational Equipment

There are some reasons why having a separate activity, and even a separate business entity such as an LLC, make sense.

If you decide that your activity should be reported on Schedule C of your individual tax return (Form 1040), then it is mostly compartmentalized by definition. But if you are reporting the equipment rental on Schedule E or Form 8825, and it is part and parcel to the rental property, a separate LLC might make you feel better about risk. A separate checking account would be nice too, but you could easily open a second personal account without needing an LLC.

Sidebar: Form 8825 is similar to Schedule E, and used in a partnership tax return (Form 1065) and S Corp tax returns (Form 1120S). Form 8825 and 1065 go together like Schedule E and 1040.

Reporting on Schedule C or Schedule E

This one is nuanced. If you provide jet skis, kayaks, canoes, bicycles and whatnot to only your rental property guests, and you are not holding yourself out to the public as someone in the recreational equipment rental trade or business, then you would report these activities on Schedule E or Form 8825.

Sidebar: This assumes an “incidental use” relationship between the rental property guest and the equipment rental. Further, this means no meaningful services beyond making the equipment available are being provided. If you’re operating the jet skis, such as like guided tours, the IRS may call that a business regardless.

Another consideration is the language found in Schedule E instructions from the IRS-

Personal property.
Do not use Schedule E to report income and expenses from the rental of personal property, such as equipment or vehicles. Instead, use Schedule C if you are in the business of renting personal property. You are in the business of renting personal property if the primary purpose for renting the property is income or profit and you are involved in the rental activity with continuity and regularity.

The important phrase from above is “primary purpose for renting the property is income or profit.” When you are renting recreational equipment in connection with your short-term rental property (and even a mid-term rental), the primary purpose is improved guest service and experience. Yes, this leads to more profit in your rental activity from increased bookings, but you get the point.

Back to the issue of reporting on Schedule C (or Form 1065) or Schedule E / Form 8825- the possible downside to reporting on Schedule E or Form 8825 is being subject to passive activity loss (PAL) limitations. Conversely, when your money is at risk and you participate in the equipment rental activity on a regular and continuous basis with a profit motive, your activity is a trade or business in the eyes of the IRS.

As such, when reporting the activity on Schedule C of Form 1040 or page 1 of Form 1065 as ordinary business activities, your losses will not be limited if you materially participate. In a one-person equipment rental business, this is typically straightforward to demonstrate since you perform substantially all of the activity’s work. You could purchase $50,000 in jet skis and other toys, and deduct that purchase against W-2 income or other income using accelerated depreciation such as 100% bonus depreciation (available for qualifying property placed in service after January 19, 2025) or Section 179 expensing (noting the nuanced limits when leveraged inside of a partnership).

Can you pick and choose? Maybe. You would need to prove your involvement is regular and continuous, and has a profit motive. You do not necessarily need to earn a profit to have a profit motive. You just need to do what typical business owners do- find new revenue and minimize expenses. Keep in mind, however, that if your equipment rental business loses money 3 out of 5 years, the IRS could deem it a hobby. The 3 out of 5 thing is a safe harbor- you could lose every year for 10 years as a startup, for example, but then you would have to show facts and circumstances to support your profit motive.

Keep in mind that a profitable Schedule C activity will be subject to self-employment taxes in addition to income taxes.

We mentioned Schedule 1 Line 8l earlier. The instructions for Form 1040 read-

Income from the rental of personal property if you engaged in the rental for profit but were not in the business of renting such property.

This wording can certainly throw a wrench in the works, right? You can report equipment rental activities using Line 8l on Schedule 1 of your Form 1040, sure, but in reality, no one does. Why? Mostly because no one knows about this language in the instructions. Also, there is not a clean way to report expenses against this income including depreciation. Having said that, some “one and done” rental activities are reported here- for example, you lend your RV one time to a work buddy, and feel compelled to report the rental income (of course you do!).

1.469-4 Election Grouping With Rental Property Activity

You can group activities that are similar into one activity for material participation testing. We discuss this more in our regulations 1.469-4 election section but the basic gist is this- the IRS allows grouping if the activities form an “appropriate economic unit” based on facts and circumstances, considering similarities and differences in types of activities, the extent of common control, the extent of common ownership, geographic location, and interdependencies (e.g., if they rely on each other for income, customers, or services).

Renting recreational equipment to your short-term rental guests would tick all these boxes. This would allow you to use both activities together to support your material participation of 500 hours, 100 hours and more than anyone else or substantially all hours. When combined with an average guest stay of 7 days or less, your hours spent on the combined activities could qualify the rental for the short-term rental loophole.

This grouping also allows you to net the losses from the equipment rental against income from the short-term rental within that combined activity. On the other hand, if both activities are deemed passive (the equipment rental and the short-term rental), then they will offset or be netted on Form 8582 regardless. If the activities are different in nature where one is passive and other is deemed nonpassive (apples and oranges), but they meet the grouping criteria above, then you might be required to group them together under Treasury Regulations 1.469-4 just to net them together.

Mechanically, you would have two entries (think two columns on Schedule E or Form 8825)- one for the rental property and the other for the recreational equipment.

Combining The Activities Without Formal 1.469-4 Election

There is another option where you simply provide access to the recreational equipment and charge a separate fee that is added to the guest fee. This is akin to heating the pool for your guests- many short-term rental property owners charge extra to heat the pool since it is expensive and not all guests want to pay for it.

How this works is that your equipment would be considered part of the overall rental property activity. The fixed asset listing on your tax returns would show land, building, acquisition costs and loan costs like normal (and 5-, 7- and 15-year property if a cot segregation study was completed), and it would also show the recreational equipment. A lot of equipment might not even be listed since their amounts are de minimis ($2,500 and under) but a jet ski or a boat or a golf cart would be.

Your recreational equipment is now tied to the rental property in a structured way and reported as one. Rental income all flows into one checking account. Expenses from gasoline for the jet ski to linens for the bedrooms are reported as supplies.

The upside to this is simplicity and to positively tell the IRS and the world that this is one activity without a formal election. You would have one entry on Schedule E or Form 8825.

There are two downsides to this- first, your rental property might not qualify for the short-term rental loophole one day (let’s say your average guest stay is not 7 days or fewer), and the losses are disallowed and carried forward including the losses from the recreational equipment. This is not particularly impactful since the losses from the equipment likely aren’t moving your tax needle that much anyway.

You might also be worried about risk- your insurance carrier or attorney or both might require separate entities such as LLCs to help separate or compartmentalize the risk.

Summary Of Renting Recreational Equipment

How can you reduce all this gobbly-goo into action items? If the renting of recreational equipment is incidental to the rental property, then you will report on Schedule E or form 8825. If you rent the equipment to the whole neighborhood and not just your rental guests, then you are likely a trade or business and will report as such.

Whether you combine the rental property and recreational equipment activities into a single activity through a Treasury Regulations 1.469-4 election, or mechanically by combined or consolidated reporting, is the remaining conundrum.

To add to your thought loop while staring art the ceiling at 3:00AM, having a separate entity or at least a separate activity allows for you to create some legal separation. This in turn could allow for hold harmless agreements or other clauses in separate rental agreements. Yes, you could also have similar agreements coming from you personally or from the LLC that holds title to the rental property itself, but some added comfort might happen with a recreational equipment rental LLC and a rental property LLC.

Who wants a table?