Regulations 1.469-9(g) Election

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

You can elect to group all your rental properties into one activity so the material participation test is less onerous. If you had three rentals and were needing to use the 500 hours test for material participation (test #1), you would need to spend 3 x 500 or 1,500 hours total at a minimum.

Mechanics of the Election

The 1.469-9(g) election is a formal election on the tax return that endures each year unless revoked. Here is Treasury Regulations 1.469-9(g) which we broke up into bite size phrases-

(g) Election to treat all interests in rental real estate as a single rental real estate activity

(1) In general.

A qualifying taxpayer may make an election to treat all of the taxpayer’s interests in rental real estate as a single rental real estate activity.

This election is binding for the taxable year in which it is made and for all future years in which the taxpayer is a qualifying taxpayer under paragraph (c) of this section, even if there are intervening years in which the taxpayer is not a qualifying taxpayer.

The election may be made in any year in which the taxpayer is a qualifying taxpayer, and the failure to make the election in one year does not preclude the taxpayer from making the election in a subsequent year.

In years in which the taxpayer is not a qualifying taxpayer, the election will not have effect and the taxpayer’s activities will be those determined under § 1.469-4.

If there is a material change in the taxpayer’s facts and circumstances, the taxpayer may revoke the election using the procedure described in paragraph (g)(3) of this section.

Keep in mind the phrase “qualifying taxpayer” is synonymous with real estate professional.

What if you forgot to make this election? The IRS has provided relief allowing certain qualifying real estate professionals to make late elections to group all interests in rental real estate. IRS Revenue Procedure 2011-34 applies to a rental property owner who failed to file a timely election to aggregate but who has filed tax returns consistent with having made the election for all the tax years in question.

Is it an election to group or aggregate? A lot of subject matter material out there will use the word “group” but the IRS in their late election relief uses the word “aggregate.” Perhaps we can all agree to group real estate trades or business together for the 750 hours test and aggregate rental properties into a single activity.

Downsides to the 1.469-9(g) Election

Are there downsides to the election? Yes there are. The most impactful problem is the need for a material change before you can revoke the aggregation. If you cannot revoke the election, any combined suspended passive losses allocable to the rental real estate activities cannot be used to minimize capital gains. Piggybacking on the language from Treasury Regulations 1.469-9(g), the verbiage continues with-

(2) Certain changes not material.
The fact that an election is less advantageous to the taxpayer in a particular taxable year is not, of itself, a material change in the taxpayer’s facts and circumstances. Similarly, a break in the taxpayer’s status as a qualifying taxpayer is not, of itself, a material change in the taxpayer’s facts and circumstances.

Is selling one rental out of three material? How about two out of three as Meatloaf sings? Yes, since you no longer have a group, right? How about three out of five? Makes you wonder. There are other issues as well, but the material change requirement for revocation is the most prominent. This becomes problematic when you have unallowed losses being carried over on Form 8582, and you want to use them upon sale of a rental property.

Having said that, most real estate investors will worry about next time, next time, and will elect to aggregate to ensure material participation is met.

You cannot pick and choose which rental properties to group for material participation. The verbiage under 1.469-9(g)(1) above should be enough, but the Treasury Regulations 1.469-9(g)(3) continues with-

(3) Filing a statement to make or revoke the election.
A qualifying taxpayer makes the election to treat all interests in rental real estate as a single rental real estate activity by filing a statement with the taxpayer’s original income tax return for the taxable year.

Read the “treat all interests in rental real estate” part again. If you cannot get enough, IRS Revenue Procedure 2011-34, which outlines how to make a late 1.469-9(g) election as described previously, reiterates the “all interests” phrase again-

03 Relief for late election under § 1.469-9(g). The Service will notify the taxpayer upon receipt of a completed application requesting relief under this revenue procedure that satisfies the procedural requirements under section 4.02 of this revenue procedure. Any taxpayer receiving relief under this revenue procedure is treated as having made a timely election to treat all interests in rental real estate as a single rental real estate activity as of the taxable year for which the late election was requested.

In the span of two subparagraphs of tax code plus an IRS Revenue Procedure, the phrase “all interests in rental real estate” is used five times. There you have it- no pick and choose. All in, or nothing. It reminds you of My Cousin Vinnie- “You were serious about that?!” Yes, apparently.

Cannot Group Short-Term Rentals with Other Rentals

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 a rental activity hinges on either providing personal services or 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, you have a short-term rental that is considered nonresidential but is still a rental activity for the 1.469-9(g) grouping.

Generally, those activities with that are similar can be considered an appropriate economic unit. However, 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.

Quickly, Treasury Regulations 1.469-4(b) read in part-

(1) Appropriate economic unit. Whether activities constitute an appropriate economic unit and therefore may be treated as a single activity depends upon all the relevant facts and circumstances. Generally, activities constitute an appropriate economic unit if the activities are sufficiently interrelated to provide significant economies of scale, significant business synergies, or significant interdependencies.

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

Average Guest Stay	Personal Services	Tax Treatment	Type	Rental Activity
Any	Yes	Business (hotel-like)	Nonresidential	Nope
>30 days	No	Traditional Rental	Residential	Yes
8-30 days	No	Short-term	Nonresidential	Yes
8-30 days	Yes	Business (hotel-like)	Nonresidential	Nope
0-7 days	No	Loophole eligible	Nonresidential	Nope

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.

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).

Tilt. What happens if a rental 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.

Using the 500 Hours Material Participation Test with 1.469-9(g)

A lot of rental property owners cannot substantiate or even justify 500 hours spent on their rental property to meet material participation. As such, they revert to the thresholds of either a) 100 hours and more than anyone else, or b) substantially all hours. However, these are problematic because you must track other people’s time.

How do you know if your hours are more than anyone else’s? How do you know if your plumber had enough hours to make your substantially all hours moot or unavailable as you scramble to hit 100 hours?

The 500 hours material participation test is the hammer- it does not care about anything other than your time. If you have one rental, Yes, this is mostly unavailable even in a short-term rental situation (10 hours a week… every week… might be a stretch unless you have a project or something).

However, if you own two rentals, three rentals, or more, and you elect to aggregate them for material participation purposes, the 500 hours test cuts down on the chore of tracking everyone else’s time and time spent on each rental property. Less recordkeeping is good- as you know or will learn, a lot of taxpayers have a good tax position but cannot prove it with proper recordkeeping. Less recordkeeping burden is less risk.