What hours count toward material participation?
As a reminder, you can only count participation hours in real property trades or businesses in which you materially participate.
To materially participate in a real property trade or business, the taxpayer must be involved in the operations of the activity on a regular, continuous, and substantial basis (IRC Sec. 469(h)(1)).
Participation hours in real property trades or businesses in which you materially participate are those that affect the day-to-day operations of the business.
If I’m married can I count my partners hours?
A married taxpayer is required to count any hours performed by his or her spouse (IRC Sec. 469(h)(5)), even if the spouse does not own an interest in the business or if no joint return is filed.
However, the spouse’s hours only count toward material participation and not toward the real estate professional status.
For landlords, that can mean:
- Hours spent acquiring property (not research hours!),
- Showing the property to prospective tenants,
- Writing and placing rental ads
- Taking tenant applications
- Running background checks and screening tenants
- Preparing and negotiating leases
- Cleaning the units after tenant move-out
- Maintaining the grounds
- Doing repairs yourself
- Doing improvements yourself or arranging (and managing, but not “watching”) others to do them
- Hiring and supervising a property manager
- Purchasing supplies and materials for use on the rentals
- Inspecting the property
- Communicating with tenants, responding to their complaints
- Collecting rents
- Evicting tenants
- Traveling to your rentals (as long as there is a business reason to do so)
- If you’re reading this list and thinking “crap I basically have to self-manage my rentals” you’re pretty much correct.
Commonly counted and should NOT be
- Travel time - The IRS’s position is that travel time does not count as participation hours in a real property trade or business. As detailed by the IRS Audit Technique Guide:
- Investor hours (includes eduction) - Additionally, “investor” hours do not count toward material participation hours (Temp. Regs. Sec. 1.469-5T(f)(2)(ii)) – such hours include: studying and reviewing financial statements, searching for new properties, education, preparing summaries of the finances or operations, or managing the finances of an activity in a nonmanagerial capacity.
- review the IRS Passive Activity Loss Audit Technique Guide and a few hundred Tax Court cases, you’ll come to the same conclusion
- Jafarpour v. Commissioner, T.C. Memo 2012-165
- Padilla v. Commissioner, T.C. Summary Opinion 2015-3
- Worked performed to avoid disallowance - We point to Temp. Regs. Sec. 1.469-5T(f)(2)(i)(B) which states that: One of the principal purposes for the performance of such work is to avoid the disallowance, under section 469 and the regulations thereunder, of any loss or credit from such activity.
- Translation: if you are logging hours simply to avoid the passive activity loss rules, those hours won’t count as participation.
This article is provided for illustrative purposes only; it does not provide personalized tax, legal, financial, or other professional advice. Your situation may be different; consult a professional for information concerning your individual tax, financial, or legal situation before taking any action.
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