Time Spent Renovating

By Jason Watson, CPA

This is quite simple but complicated all the same. If your rental property has never been placed in service (ready and available for occupancy, and held out for rental use through advertising and related efforts), the time spent during this period does not count towards material participation. Let’s run through some quick examples-

• You purchase a rental property on May 1 and spend the next 30 days decorating, placing furniture, cleaning up the yard and painting. You could argue the rental property is in-service, and the time spent counts towards material participation.
• You purchase a rental property on May 1, attempt to find tenants or guests through Labor Day, and then decide to renovate the kitchen and bathrooms during some slower periods. Your time during the summer counts towards material participation and continues during renovations if you do the work yourself or directly supervisor others.
• You purchase a rental property on May 1 and immediately start renovations. Your time supervising contractors, meeting with designers, picking up building materials, etc. does not count toward material participation. Why? A rental property must be in-service as defined just a moment ago for your time spent to be considered time spent on a rental activity. In other words, you must spend time on an activity for it to be considered material participation, and if it is not an activity because the primary asset was not ever placed in-service, then you are not materially participating. Bummer.

Here is the silver lining alluded to earlier- your time spent on the rental property during renovations may count towards the 750-hours requirement for real estate professional status. Huh? As a reminder, IRC Section 469(c)(7) reads-

For purposes of this paragraph, the term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

Therefore, while time spent on construction, reconstruction or conversion does not count towards material participation, it counts towards the 750 hours needed for real estate professional status. Feel better? Unlikely. We get it. See our real estate professional status section for fun details.

The bottom line to all this- get that rental property ready and available for occupancy, and ensure it is being held out for rental use through advertising and related efforts before renovations. We understand that this might be feasible given the condition of the property.

Also, keep your records in good order to support the in-service assertion while the rental property is vacant or getting ready for its first guest or tenant. Put forth efforts to rent the property, and document those efforts.

See our idle property versus vacant rental property section for more information about vacant rentals and the deduction of expenses. Also, see our rental property in-service defined section for expanded comments on ready and available, and held out for rental use.