Material Participation Revisited For REPS

By Jason Watson, CPA
Posted Sunday, May 25, 2025

As listed in our mini agenda, we dug deep into the material participation list in a previous section on page xx. In that section we also provide excerpts from the IRS Passive Activity Loss Audit Techniques Guide (ATG) plus our own commentary. Here is the list again according to Temporary Treasury Regulations 1.1469-5T(a)–

(a) In general. Except as provided in paragraphs (e) and (h)(2) of this section, an individual shall be treated, for purposes of section 469 and the regulations thereunder, as materially participating in an activity for the taxable year if and only if—

(1) The individual participates in the activity for more than 500 hours during such year;

(2) The individual’s participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year;

(3) The individual participates in the activity for more than 100 hours during the taxable year, and such individual’s participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year;

(4) The activity is a significant participation activity (within the meaning of paragraph (c) of this section) for the taxable year, and the individual’s aggregate participation in all significant participation activities during such year exceeds 500 hours;

(5) The individual materially participated in the activity (determined without regard to this paragraph (a)(5)) for any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year;

(6) The activity is a personal service activity (within the meaning of paragraph (d) of this section), and the individual materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year; or

(7) Based on all of the facts and circumstances (taking into account the rules in paragraph (b) of this section), the individual participates in the activity on a regular, continuous, and substantial basis during such year.

Tests #1, #2 and #3 are the ones used 99% of the time by real estate investors. You can read the IRS Audit Techniques Guide (ATG) for Passive Activity Losses with this link-

https://wcginc.com/wp-content/documents/ATG-PAL.pdf