Material Participation Frequently Asked Questions

By Jason Watson, CPA
Posted Sunday, May 25, 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.

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.

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.