Material Participation in a Partnership

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

Many real estate investors utilize the 100 hours and more than anyone else material participation entry point or threshold. 100 hours is easy, and you just need to ensure the cleaner, as an individual, does not spend more hours than you. But what about your business partner? If your partner is your spouse, hours can be combined for material participation. However, if your partner is the brother-in-law mentioned above, this becomes problematic.

A literal reading of the tax code suggests that you and your business partner must each be over 100 hours but also that your hours are identical. Here is a snippet from Treasury Regulations 1.469-5T(a)(3)–

Let’s rewrite this, shall we-

(3) The individual participates in the activity for more than 100 hours and their participation is not less than any other individual (including individuals who are not owners);

If they are at 103, you need to be at 103. This way your time is not less than your business partner. At times tax professionals, including WCG CPAs & Advisors, will say, “100 hours and more than anyone else.” This is not wrong, but it is not precise either since if it were, then each of you at 103 hours would not qualify, right?

Another consideration- In all the material participation chatter, the 7th test, which is facts and circumstances, is often thought of as kryptonite. Don’t touch it. Don’t look at it. We disagree. Keep mind the underpinning of the material participation tests- they are bright lines to remove the need for a facts and circumstances based argument. “Hey, give us a credible and reasonable time log and we’ll check the box without further explanation.”

Yet, the facts and circumstances argument or defense remains very much available. It would be silly to think that if you had 103 hours, and your business partner had 107 hours, the IRS would consider your participation efforts to be not material. Having said that, if you have 103 hours and your co-owner had 210 hours, that might be viewed differently.

Also, you can think of it this way- material participation is a per human and per individual tax return (Form 1040) sort of thing, and you don’t file a Form 1040 tax return with your brother in-law. That’d be weird and likely illegal in most states. Thanksgiving would be super awkward.

Finally, don’t forget about your spouse! As mentioned elsewhere, under Treasury Regulations 1.469-5T(f)(3), your spouse’s hours count towards material participation. Similar to the “per tax return” concept above, a jointly filed tax return combines the hours of both spouses for material participation. Paint that wall together. Fix that deck in between sips of bourbon. Honey do lists becomes honeys do it together lists.

Furthermore, it does not matter if the K-1 from the partnership is only in one spouse’s name nor does community property versus common law property states come into play. Keep in mind, however, that spousal hours do not count towards the 750 hours needed for real estate professional status (REPS).