Material Participation Frequently Asked Questions

By Jason Watson, CPA
Posted Monday, July 7, 2025

Here are some FAQs you might find helpful for material participation-

Why does material participation matter for real estate investors?
It determines whether your rental activity is passive or non-passive, affecting your ability to deduct losses against other income.

What is the 500-hour material participation test?
If you work more than 500 hours on a rental activity in a year, you are materially participating under Test #1. Consider that this is nearly 10 hours a week, every week.

What is the “100 hours and more than anyone else” test?
If you work over 100 hours and more than any other person, you meet the material participation standard (Test #3). This is the common one used among rental property investors and landlords.

What does “substantially all” participation mean?
You did all of the work, with others participation being negligible or extremely incidental (like a lawn service, and only a lawn service and not a gaggle of support).

Can time from both spouses count toward the material participation tests?
Yes. Spouses’ time can be combined for material participation but not for the 750-hour REPS requirement.

Does investor time count toward material participation?
No. Time spent on financial analysis, research, or reviewing reports is considered investor time and does not count. It would be a runaway train otherwise.

Does time spent acquiring a rental property count toward the 750-hour real estate professional requirement?
Yes, acquisition time can count toward the 750 hours for real estate professional status, but it does not count toward material participation for a rental activity. Acquiring a short-term rental will not count towards the 750-hour test, however.

When does material participation in a rental activity begin?
For long-term rentals, or any rental that is not considered a short-term rental with an average guest stay of 7 days or less, material participation begins only after the rental property is placed in service, meaning it is ready and available for occupancy and held out for rental use.

Can acquisition time for a short-term rental count toward material participation?
Yes, because short-term rentals (average stay of 7 days or less) are not considered rental activities but rather trade or business activities, so acquisition time can count toward material participation.

Does short-term rental time count toward the 750-hour real estate professional status requirement?
No, short-term rental time does not count toward the 750 hours because STRs are not considered rental activities or real estate activities for this purpose.

What activities likely do not count toward material participation, even for short-term rentals?
Activities such as reading market reports, viewing real estate listings, meeting with brokers or lenders, or creating ROI/IRR spreadsheets generally do not count toward material participation.

What about supervising contractors or maintenance workers?
Yes, as long as the property is in service and the supervision is active and direct, it may count toward participation time.

Is using a property manager a problem?
Not necessarily. But if their individuals (repair people, cleaners, managers) spend more time than you, as individuals, your hours may not satisfy the “more than anyone else” rule.

Can I pick and choose which rentals to aggregate?
No. Under 1.469-9(g), aggregation applies to all rental interests or none at all.

Do I need a time log?
Yes. Keep a detailed log of activities, hours, and proof (emails, receipts, calendar events) to support your participation claims.

Does renovation time count?
Yes even if the rental is offline as long as the property is in service.

What’s the purpose of the 1.469-9(g) election?
It allows you to treat all your rental properties as one activity, simplifying the hours test and reducing tracking complexity.

What is the difference between the 1.469-9(g) and 1.469-4 elections?
1.469-9(g) is exclusively for qualifying taxpayers, and more commonly known as real estate professionals. Whereas 1.469-4 is a general election to group activities that are an appropriate economic unit such as all short-term rentals, or your business and office building.

Do short-term rentals require material participation?
For the loophole, Yes, but they’re not considered rental activities under IRS rules, so you can qualify without REPS if you materially participate.