Regulations 1.469-4 Election

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

Bear with us as we dig into a small tidbit that could blow up your material participation world. As we’ve defined in several places, a short-term rental is any rental where the average guest stay is 30 days or less. Whether it is considered a rental activity hinges on either a) providing substantial personal services or b) if the average guest stay is 7 days or less.

As such, if you have a rental where the average guest stay is 20 days and you do not provide hotel-like services (daily or mid-stay linen changes, concierge services, transportation, on premise fitness or spa, etc.), you-

• have a short-term rental
• that is considered nonresidential
• but is still a rental activity (and would be more appropriate for the 1.469-9(g) grouping).

Generally, those activities that are similar can be considered an appropriate economic unit. Treasury Regulations 1.469-4(c) read-

(2) Facts and circumstances test. Except as otherwise provided in this section, whether activities constitute an appropriate economic unit and, therefore, may be treated as a single activity depends upon all the relevant facts and circumstances. A taxpayer may use any reasonable method of applying the relevant facts and circumstances in grouping activities. The factors listed below, not all of which are necessary for a taxpayer to treat more than one activity as a single activity, are given the greatest weight in determining whether activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469—

(i) Similarities and differences in types of trades or businesses;

(ii) The extent of common control;

(iii) The extent of common ownership;

(iv) Geographical location; and

(v) Interdependencies between or among the activities (for example, the extent to which the activities purchase or sell goods between or among themselves, involve products or services that are normally provided together, have the same customers, have the same employees, or are accounted for with a single set of books and records).

Let’s bring in a summary table to help navigate this madness-

Don’t shoot the messenger, but there is a subtle difference in the election as well. Treasury Regulations 1.469-9(g) is specific for real estate professional status (REPS) whereas Treasury Regulations 1.469-4 is used for general grouping of activities as one business activity with the same characteristics (appropriate economic unit) such as short-term rentals qualifying for the loophole.

So, the first line and the last two would be grouped under 1.469-4 and the second and third would be grouped under 1.469-9(g). We have a table coming up, but you need to wait a bit.

Another way to say this- group your short-term rentals with an average guest stay of 7 days or less under 1.469-4 and group all other rentals (excluding hotel like rentals) under 1.469-9(g).

What happens if a rental activity changes from short-term to long-term to mid-term with hotel-like services back to short-term? You are likely to get shot by your real estate tax professional. Not fatal, but painful.

Could your group your bed and breakfast with your short-term rental? Yes, and it is not a bad idea. Keep in mind that a bed and breakfast is considered a hotel since substantial personal services are provided. As such, this is not a rental activity. A short-term rental with an average guest stay of 7 days or less is also not a rental activity (it is viewed as a business yet reported on Schedule E or Form 8825, and not Schedule C). Therefore, these two activities may be grouped into one activity to assist with material participation hurdles.

Caution! Before you blast off with your 1.469-4 election, a quick reminder is in order that the regulations require the grouping to be an appropriate economic unit. As such, they must share common control or management, must be similar in nature and should be geographically aligned.

Sidebar To The Caution: Keep in mind that when these regulations were written, working and managing things from a distance were not well contemplated. The geographical provision was meant more as a barometer of your ability to manage the grouped activity as one versus a strict rule on geography itself.

Here is yet another table to visualize grouping elections-

Would you ever group your various rental activities, such as long-term rentals, into one activity under Treasury Regulations Section 1.469-4? There might be a super narrow and rare reason to, but generally, No.

Also, you cannot group your rental properties into one activity to harvest a loss. For example, you own two rental properties- Elm Street and Main Street. Elm has a bunch of passive activity loss carryovers. You want to sell Main but harvest your losses from Elm. Grouping them does not allow for this otherwise wonderful idea. “A” for effort though!

Here is the verbiage from Treasury Regulations 1.469-4(g)(1)(i)–

(g) Dispositions.

(1) General rule. If a taxpayer disposes of an activity (within the meaning of §1.469–4(f)) in a fully taxable transaction to an unrelated party, gain or loss from the disposition is not taken into account in determining the income or loss from any other activity. For this purpose—

(i) If a taxpayer has grouped activities under this section, a disposition of all or substantially all of those activities constitutes a disposition of an entire activity for purposes of section 469(g)(1)(A). A disposition of less than substantially all of the grouped activities does not constitute a disposition of an entire activity.

Our cannot group short-term rentals with other rentals section repeats a lot of this, but also adds some more insights and considerations.

Grouping Your Business And Office Building

This is not relevant to material participation, but a good reminder nonetheless. As mentioned elsewhere, you may want to group your business with your office building. Huh? Let’s say you own an architectural firm, and for various reasons the business does not own the office building. Rather, you own it personally or in another entity, and lease it to your architectural firm at fair market rent, and blah blah blah.

The regulations allow you to group these two activities. Treasury Regulations 1.469-4(c) read-

(1) In general. Rental activities may not be grouped with any other activity unless the rental activity is insubstantial in relation to the trade or business activity or the trade or business activity is insubstantial in relation to the rental activity, or unless the activities are integrated in a manner that makes them interdependent.

Why would you want to do this? Self-rentals, as in the example above, are treated like any other rental property where losses are likely limited by passive activity loss limitations. If the building was owned by the architectural firm directly, then you could perform a cost segregation study and deduct a tidy loss against the business income.

Sidebar: We say fair market rent and blah blah blah above. However, be careful since self-rentals are considered non-passive and therefore the profits from those activities cannot offset or absorb losses from traditional rental properties. So, before you crank up the lease amount because you have other rental losses to offset, keep this little rule in mind (and No, you cannot group them together either). Sorry.

You split the business and building up, and yuck, you cannot deduct the rental losses. Smart people recognized this problem, and created the regulations above to resolve this conundrum. In other words, you can still perform a cost segregation study on your self-rental and create a tax deductible loss against your business profit using the 1.469-4 election.

We digressed a bit in a chapter on material participation. Ah, you’re better for it, right?