The Overlooked SPA Material Participation Test

By Jason Watson, CPA
Posted Saturday, November 1, 2025

Most rental property owners, and even a fair number of real estate CPAs, see material participation as a three-way game between-

• 500 hours,
• 100 hours and no one did more than you, or
• Substantially all hours.

We do too and it is peppered throughout our book. This trinity covers 95% of the material participation options. But…

Often overlooked is the Significant Participation Activity (SPA) test, found in Treasury Regulations Section 1.469-5T(a)(4). We will call this the “SPA test” since it sounds fun and rolls off the tongue- everyone also likes a good spa, right? We can also call this threshold or test #4 since it is fourth on the list of seven. The SPA test is halfway down the list, and conveniently also the middle lane or blended material participation test.

In a nutshell, the SPA test rewards people who genuinely work in multiple ventures, and at times without the laborious time tracking of others or the worry that someone is spending more time than you. Yay!

The SPA Test in Plain English

Here’s the regulation verbatim-

(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.

And paragraph (c) of Treasury Regulations Section 1.469-5T(c) defines what significant participation means with-

Tilt, right?

In other words, a SPA lives in the sweet spot- more than 100 hours, less than 500, and not already material by some other test. Cross 100 hours, clear 500 hours in the aggregate, and you’re in business on getting those pesky passive losses to become active and therefore deductible against your high W-2 income or other income.

Why the SPA Test Exists

When legislators wrote IRC Section 469, they wanted to prevent passive investors from sheltering income, sure, but they also did not want to punish working owners who happen to spread their time across several smaller activities. How nice, right? Without this material participation provision, someone running four real businesses, each at 150 hours a year, could lose valuable tax deductions simply because of diversification. The SPA test fixes that inequity when your facts line up just right.

SPA Basics

Let’s say you run three ventures: a craft business (110 hours), a tutoring side gig (160 hours), and a self-managed short-term rental cabin (250 hours). No activity hits 500 hours, but all exceed 100 and your total is 520 hours.

Under Treasury Regulations Section 1.469-5T(a)(4), you materially participate in aggregate without the grouping election (which has its limitations), no paperwork, no heroic hour-padding (you wouldn’t dare), etc. Just genuine, hands-on time across several active pursuits.

Sidebar: To group activities under Treasury Regulations Section 1.469-4, an appropriate economic unit meet a facts-and-circumstances test considering factors like similarity of business type, common control and ownership, geographic location, and interdependencies. Right off the bat, grouping a rental property with a tutoring side gig fails the “similarity of business type” criterion, and perhaps others.

Who wants a cheesy tagline? SPA test is aggregation without grouping frustration. There are some devils in the details, so read on!

When Others Participate

Now let’s complicate your rental activity. Like most short-term rental property owner who have a lot going on, you hire a cleaner after each guest stay. Moreover, they spend more time on the rental than you do. Does that ruin your material-participation claim? No.

The SPA test counts only your hours; it doesn’t subtract or offset anyone else’s. The cleaners, handyman or lawn crew’s time neither helps nor hurts. The only requirement is that you exceed 100 hours for the rental activity and your aggregate SPA total exceeds 500 hours. Yay, right?

That distinction matters. Other material participation tests, such as “no one else did more” or “substantially all,” explicitly compare your hours to everyone else’s. The SPA test does not. As long as you personally coordinate bookings, guest communication, repairs, and maintenance decisions, you are the operator with continuous and regular managerial involvement.

Sidebar: Does this mean you can skip recording a time log? Nope. You must still support and defend the 100 hours of participation with specifics on what you did. The silver lining is that you don’t have to track other people’s time which you typically must do in the “100 hours and no one did more than me” material participation test. Test #3 if you are counting.

Here is a table to visualize this-

Material Participation Test	Track Others’ Hours
1. 500-hour	No
2. Substantially all	Yes
3. 100-hour, and no one more	Yes
4. SPA	No

Why Bother With SPA If I Already Qualify

You might be asking- if I have two rental properties where I already participate at least 100 hours each and no one participated more than me, why do I need to aggregate under SPA? Don’t I already qualify as materially participating? The short answer, Yes, but the SPA test can still make your life easier. Under SPA, you don’t have to track or defend other people’s hours, only your own as we’ve shown above. Sure, the aggregate threshold is higher at 500 hours, but it’s often less paperwork, fewer gray areas, and a cleaner audit defense.

But here’s where SPA really helps. Let’s say you have 4 rentals where you spend 126 hours participating in their operations. However, in 3 of the rentals, others spend way more time than you such as 150 hours compared to your 126 hours. You could elect to group them under 1.469-4 and hit the grand-daddy threshold of 500 hours, but with SPA you don’t have to worry about the pitfalls with the grouping election, and you also don’t have to worry about other hours exceeding yours. Also, you might not be eligible for grouping since there are rules associated with the election.

Want another example? You still have 4 rental properties but each of your rentals has others who spend more time than you. However, when you aggregate them with your side hustle, where you have a very active partner, the SPA test works. You’re active enough to matter even if others rack up more time on individual properties. Here is a table to illustrate-

	You	Others
Rental 1	100	150
Rental 2	100	150
Rental 3	100	150
Partnership Business	201	250

Separately, none of these activities would be considered material participation and you cannot elect to formally group them since they are disparate in business entity and management / operations. This is where SPA comes in. Sure, narrow example, but it underscores the usefulness with your unique set of facts.

When The SPA Stinks (or can’t be used)

Let’s say you log 150 hours in a consulting side gig, 340 hours managing an eBay resale project, and another 80 hours tutoring. Only the consulting and eBay gigs qualify as SPAs (over 100 hours). As such, the total hours are only 150+340 or 490 hours, just a bit shy of the 500 hours needed. This was the very problem in Brumbaugh v. Commissioner, T.C. Memo. 2018-40. The taxpayer claimed hundreds of hours in an aircraft LLC but couldn’t show the 500-hour aggregate across multiple SPAs. The Court summarized simply-

Petitioner has not shown that his aggregate participation in all significant participation activities during such year exceeds 500 hours. See sec. 1.469-5T(a)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988). In sum, petitioner has failed to meet his burden of proving that he ‘materially participated’ in N444SS during 2007.

The SPA test is a three-part test (the regulations say it is a two-prong test, but we want to tease out a subtle annoyance). First, the activity must qualify as a significant participation activity, which we will discuss in detail in a bit. From there, you need 100 hours in each activity for it to invited to the SPA aggregation party, and then the aggregated hours must exceed 500 hours across all eligible SPAs. Who doesn’t like party with a spa?

Qualifying The Activity As A SPA

Another subtle trap. Correction- the trap is not so subtle, but the application is. Here we go- once an activity already meets a different material participation test, it cannot be a SPA in the same year. Huh? Technical Advice Memorandum 202229036 reads in part-

Section 1.469-5T(c)(1)(ii) provides that an activity is a significant participation activity only if the activity would be an activity in which the individual does not materially participate for the taxable year if material participation for such year were determined without regard to paragraph (a)(4) of this section.

Did that help? Probably not. Here it is in plain English- if an activity qualifies for material participation under another test, it cannot be considered a SPA activity for the 100-hour and 500-hour aggregate tests. What’s the big deal?

The 100 hours and no one did more than me and the substantially all hours tests are easy to trip, and therefore those activities become ineligible for the SPA test.

What About W-2 Jobs?

Taxpayers often ask whether a W-2 job counts toward SPA hours, or worse, whether it ruins the test. The answer is easier than it looks. A W-2 job isn’t even in the IRC Section 469 world (no party invite). Section 469(c)(6) reads-

The term ‘passive activity’ does not include any activity performed as an employee.

That one line takes employment completely off the board. You can’t include your day job hours in the SPA total, which seems obvious, but those hours can’t disqualify you either.

The only time a W-2 job matters is for real estate-professional status (REPS), where you must spend more than half your personal service time in real property trades or businesses. Those 2,080 W-2 hours make REPS qualification difficult (which is to say impossible) but they don’t touch SPA eligibility.

The Tax Court’s Track Record

Few cases address SPA directly, but the ones that do show its boundaries clearly.

In Padda v. Commissioner, T.C. Memo. 2020-154, a physician with ownership in five restaurants and a brewery logged more than 100 hours in each and “well over 500 hours” total. The Court believed his testimony and travel records, holding he materially participated via the SPA test even without grouping the entities. This is Mia’s spiritual twin case: multiple mid-level ventures, credible documentation, no single 500-hour monster in the SPA gaggle.

In Scheiner v. Commissioner, T.C. Memo. 1996-554, the Court described a SPA as an activity in which the taxpayer “participated for more than 100 hours during the tax year, with the level of participation not qualifying as material.” That simple sentence has anchored a lot of other discussions and court decisions. In other words, the quote is saying that while your participation is not material as defined elsewhere, it certainly is significant and cannot be ignored when aggregating under the SPA test.

Scheiner is one of those fundamental underpinnings to SPA considerations.

In Gregg v. United States, 186 F. Supp. 2d 1123, the district court noted that once an activity already satisfies the 500-hour material participation test, it can’t also qualify as a SPA for that same year (which we already discussed, but wanted to drive home the point). That activity stands on its own as “material,” and the SPA test simply doesn’t apply.

Together, these authorities sketch a neat box-

• under 100 hours, too small
• 100 to 499 hours, SPA territory
• 500+ hours, already material and excluded from SPA aggregation.

This is sort of a goldilocks situation. Too soft, too hard, just right.

Grouping Still Matters, Just Differently

Treasury Regulations Section 1.469-4 allows taxpayers to group several activities into one “appropriate economic unit” as we side barred previously. That can help when operations truly function as a single business or activity and you are trying to support material participation across them all. However, this election comes with baggage. Once grouped, always grouped, unless facts materially change. That can be problematic in certain circumstances.

The SPA rule, by contrast, requires no election. You can keep your activities separate for tax reporting yet still aggregate your hours informally for the 500-hour SPA threshold. That flexibility can be helpful for real estate investors or rental property owners with a gaggle of unrelated ventures that don’t meet the “appropriate economic unit” standard or want to be boxed in with the 1.469-4 election.

Real Estate Professional Status Overlay

If you qualify as a real estate professional, the SPA test can help determine final leg which is material participation within your rentals. This is especially helpful if you have several smaller properties where each one alone doesn’t meet the other material participation thresholds. For example-

• You spend 750 hours or more on real estate activities,
• More than half of your personal service time is spent on your rental properties (not including short-term rentals, which are not “rental activities” under IRC Section 469 but rather businesses, like a hotel), and
• You have four long-term rentals, each requiring about 150 hours of your time (over 100 hours but less than 500 hours).

In this case, you can apply the SPA test across those rental properties to establish material participation without using the 1.469-9(g) election (which is unique to REPS and separate from the 1.469-4 grouping election).

If you have made the 1.469-9(g) election to treat all rentals as one activity, you then test that single grouped activity under the standard material participation rules such as the 500-hour, 100-hour and no else did more or substantially all hours tests. The SPA test itself becomes irrelevant because SPA requires multiple distinct activities to aggregate; once they’re grouped, you have just one activity. In other words, you need at least two activities to have a SPA discussion (and at least two people to have a spa party).

Could you instead group your long-term rentals under 1.469-4, and then combine that now single activity with your short-term rentals under the SPA test? Theoretically you could, but in practice it rarely works. Once an activity, even a grouped one, meets a material participation test, it is already material and no longer eligible for SPA treatment.

Quick sidebar-

1.469-4 The “Economic Unit” Grouping. Let’s you combine multiple businesses or rentals into one activity if they form an appropriate economic unit based on common ownership, control, geography, or interdependence. It’s available to anyone and applies to both rentals and trades or businesses.

1.469-9(g) The Real Estate-Professional Election. Exclusive to real-estate professionals under IRC Section 469(c)(7). It allows all rental real-estate interests to be treated as a single activity solely for material-participation testing. It doesn’t depend on economic factors. Keep in mind that short-term rentals are not rental real estate interests.

We discuss grouping elections in deeper detail in later sections.

Final Thoughts Sitting In The SPA

For taxpayers with multiple mid-size ventures or activities, the SPA test can be a practical material-participation entry point if you want to reduce paperwork and time tracking of others. So, if you can say, “I’m busy everywhere but not full-time anywhere,” the SPA test might prove useful. Sure, it might not blow your hair back either since you might materially participate in using the 100 hours test- however, and it bears repeating, if you spend 100 hours per activity and others do spend more time than you, then SPA is your friend.

In summary, two reasons to use the significant participation activity (SPA) test-

• You don’t want to track other people’s time, or
• You cannot formally group activities because they are ineligible to be grouped, and they separately don’t qualify for material participation, or
• You have several activities where others spend time than you (think 4 rentals plus side gig where others are blowing up your material participation with their hours).

Yes, these are narrow reasons. Yes, this is a lot reading to get through. Yes, you are better for it.