What Time Counts For Material Participation

By Jason Watson, CPA
Posted Saturday, August 10 2024

This section is a bit of doozie and needs a small introduction. Here’s the mini agenda-

• We review what time does not count. Easier to get that out of the way, and in some respects defining things in the negative is helpful. If you can’t do X, then everything not X is good to go by default.

• Next, we will discuss the 750 hours test for real estate professional. We are getting ahead of ourselves since we haven’t discussed the benefits of having real estate professional status (REPS). However, once the groundwork is laid out for what time counts and what time does not, the section on REPS is more manageable. No, having REPS is not an incurable disease.

• Finally, we will run through time logs, being a licensed real estate agent, the difference between real estate broker and mortgage broker, and the 1.469-9(g) Election.

However, we reserve our expanded discussions on real estate professional and short-term rentals to a later section. The discussion on which hours count and which ones don’t is nice groundwork.

Real Property Trade or Business Defined

Let’s state the over-arching standard and read IRC Section 469(c)(7) again for fun-

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.

Seems simple enough. All this same, this is a bit vague, yes?

Research Time Does Not Count

A lot of investors claiming real estate professional status attempt to fill in the holes of their hourly requirements and day-to-day involvement by suggesting research into other investment properties. While this sounds legitimate, the IRS and Tax Court have denied this position as investor activities and not real estate activities. Find something else to put on your time sheet- cut some grass, hunt and peck your QuickBooks entries, but don’t log Zillow hours.

However, in Hailstock v. Commissioner, Tax Court Memo 2016-146, the rental property owner did not keep a log with specific hours. It might have actually helped since the Tax Court accepted her narrative plus her massive array of several rental properties as enough evidence to demonstrate 750 hours of participation for real estate professional status. The case reads in part-

We find petitioner’s narrative summary convincing because she owned numerous rental properties and conducted her business as a “one-man operation” without being otherwise employed. As previously discussed, petitioner spent well in excess of 40 hours each week doing work related to numerous rental properties (i.e., researching prospective properties, maintaining properties, supervising work orders, finding tenants, securing leases, and continuing education related to rental real estate).

This is a win; however it should not be construed that research and continuing education hours are valid participation hours. In Hailstock, she simply had well over twenty properties, and it was the only thing she spent time on. See our discussion on time logs later.

Investor Time Does Not Count

According to IRS Publication 925 Passive Activity and At-Risk Rules, you do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. Here is a quick blurb-

Work you do as an investor includes:

1. Studying and reviewing financial statements or reports on operations of the activity,

2. Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and (note the tag line of “for your own use” which might contrast to “tax return preparation use”),

3. Monitoring the finances or operations of the activity in a non-managerial capacity.

Note that these activities are acceptable as long as you can demonstrate a day-to-day involvement with the activity. This is critical since it is presumptuous of the IRS to consider rental activities not requiring day-to-day involvement. What situation would count? If you directly operated a real estate hedge fund or investment trust, then you likely participating in the activity on a daily basis.

Acquisition Time Might Not Count (But Might!)

Full-on disclaimer here- several resources out there are all over the map and most provide caveats stating what exactly counts as acquisition time and what does not count is unclear. Lovely, right? We tend to swim in gray waters all the time with taxes… add acquisition time to the list. Keep in mind IRC Section 469(c)(7) above with the word “acquisition.” You should not be afraid of an audit. You should not be afraid of losing an audit. You should be afraid, however, of having an unreasonable tax position.

Let’s run through a scenario-

• You spend 10 hours looking at Zillow and crunching numbers. Those hours are considered investor hours, and therefore do not count (yet).

• You find a rental property, and travel to the location for inspection. You spend time reviewing the inspection reports and contracts and whatnot. This time is still investor time.

• You close on the deal, and boom, investor hours convert to acquisition hours. The specific hours spent on Zillow associated with the property acquisition suddenly count towards material participation. We take a deeper look at travel time in our material participation section.

To be certain, the above example is not detailed in an IRS publication or memo or revenue procedure. This is simply a plain reading of IRC Section 469(c)(7) mixed with some common sense.

Travel Time Might Not Count (But Might!)

Treasury Regulations Section 1.469-5(f) reads-

(f) Participation-

(1) In general.
Except as otherwise provided in this paragraph (f), any work done by an individual (without regard to the capacity in which the individual does the work) in connection with an activity in which the individual owns an interest at the time the work is done shall be treated for purposes of this section as participation of the individual in the activity.

Ok, but Treasury Regulations Section 1.469-9(b)(4) states-

(4) Personal services.
Personal services means any work performed by an individual in connection with a trade or business. However, personal services do not include any work performed by an individual in the individual’s capacity as an investor as described in § 1.469-5T(f)(2)(ii).

Is travel considered a personal service? In the IRS Passive Activity Loss Audit Techniques Guide, the IRS suggests-

Travel Time generally should not be considered in computing the hourly tests for material participation, particularly if other factors indicate the taxpayer is not participating in the activity on a regular, continuous and substantial basis. [9] Legislative history provides that “services must be integral to operations”. It is somewhat difficult to construe that travel constitutes “services” or “participation” as contemplated by Congress or the Regulations. More importantly, travel is not integral to operations in most cases.

Let’s turn to some tax court cases.

In Trzeciak v. Commissioner, Tax Court Memo 2012-83, the IRS asserted in allowing the time spent traveling if you are also claiming a home office that is used regularly and exclusively for your real estate activities.

In Leyh v. Commissioner, Tax Court Summary Opinion 2015-27, she had only 632.5 hours on her time log but explained during audit that she had failed to record the time spent traveling among her 12 rental properties. The IRS countered that her log was inclusive of travel time, but based on her testimony at trial, the Tax Court found that she had not included travel time in the time log and allowed her to restate the time log.

The Tax Court was certainly having a nice day and was being taxpayer-friendly. Perhaps Leyh brought some chocolate.

There is also some case law saying No. In Truskowsky v. Commissioner, Tax Court Summary 2003-130, unless a taxpayer can prove day-to-day managerial involvement, then travel time is considered commuting, which is personal in nature, and therefore does not qualify. To be certain, Truskowsky’s travel was a bit self-serving since it was not solely for business but had some pleasure mixed in by visiting family.

While your mileage might vary, pun intended, a reasonable tax positions starts with-

• Assert the home office position on your tax returns right away (yes, assuming your home office qualifies). The home office assertion suggests regular and exclusive use.

• Demonstrate and provide proof of day-to-day participation in your rental properties

How many rental properties do you need to assert a home office? 3? 5? Who knows! It is situational. Some rentals are a pain in the butt; others run like clockwork. In our opinion, day-to-day participation is a higher standard than regular, continuous and substantial.

Sidebar: Personal service is scattered throughout this section and is one of the pillars of testing your participation. How much personal service is being done on your real estate investments while sitting on an airplane? Perhaps a lot if you are reviewing contracts and balancing your rental property checkbook. How much personal service is being done driving a car for three hours? Perhaps a lot if you are on the phone chatting about your partnership tax returns and 1031 like-kind exchange concerns with your real estate CPA at WCG CPAs & Advisors. Be reasonable but don’t skimp.

Sweat Equity Time Does Not Count

IRS Publication 925 Passive Activity and At-Risk Rules talks about work that is not normally done by owners and investor activities (versus managerial activities). Here is another blurb from the lovely publication-

Work not usually performed by owners. You don’t treat the work you do in connection with an activity as participation in the activity if both of the following are true.

1. The work isn’t work that’s customarily done by the owner of that type of activity.

2. One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules.

That second component is your escape hatch, right? Do you cuff yourself to your desk as you admit to that? Sure, your 9-5 is anything but a home builder yet you are handy, and can lay down tile with the best of them. The IRS could contend that your tile work is not customarily done by a rental property owner (which is stretch anyway) but to assert that you installed tile with the sole purpose of puffing up your hours is a virtually groundless assertion.

What if you stink at home improvement? What if you are not a handy guy? In Lee v. Commissioner, Tax Court Memo. 2006-193, the real estate investor’s time log showed spending 24 hours to replace blinds, 56 hours to replace a toilet, and over 280 hours to wrap-up the financial statements for tax preparation. The Tax Court found the time entries to be unrealistic and not credible.

Other Time That Does Not Count

Let’s review IRC Section 469(c)(7) again since it’s been a few pages and likely a cocktail ago-

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.

Here are some interesting and perhaps quirky developments for the next cocktail-

In Calvanico v. Commissioner, Tax Court Summary 2015-64, the Tax Court held that a real estate appraiser who worked for a public accounting firm was in a real property trade or business. However, the accountants and support staff were not considered working in real estate.

Hours spent as an employee are not counted unless the employee is a 5% or greater owner in the entity conducting a real estate trade or business. In Calvanico v. Commissioner, Tax Court Summary Opinion 2015-64, and Pungot v. Commissioner, Tax Court Memo 2000-60, the taxpayers were denied real estate professional status because they did not own the required 5% of their respective employers, and consequently, the hours spent in their real property trades or businesses did not count toward material participation.

The Calvanico Tax Court case has some mini lessons. If you work for a non-real estate business doing real estate things, that time likely counts. If you work for a real estate business doing non-real estate things, that time unlikely counts. If you own 5% or more of a real estate business and your participation is material, the things you do are presumed to be real estate things and that time will count.

In Moss v. Commissioner, 135 Tax Court 365 (2010), the rental property owner argued that he should be permitted to include hours spent “on call,” when a tenant could contact him if necessary. The court denied the tax position because the taxpayer was not actually performing services during those hours, and therefore the time could not be counted toward the 750-hour requirement.

To repeat ourselves, and to buttress the court’s contention in Moss, Treasury Regulations Section 1.469-9(b)(4) states-

(4) Personal services.
Personal services means any work performed by an individual in connection with a trade or business. However, personal services do not include any work performed by an individual in the individual’s capacity as an investor as described in § 1.469-5T(f)(2)(ii).

Keep that personal services threshold in mind. Dreaming of your rentals doesn’t cut it. We wonder if the IRS would adopt Mohammed Ali’s saying “if you dream of beating me, you’d better wake up and apologize.” We digress.

Quick Preview of Qualifying as Real Estate Professional

Before we go too far down the time road, let’s quickly review the simplified basics of real estate professional status-

• You materially participate and provide personal service hours of 750 or more in real property trades or businesses.

• Over half of your time spent on all activities where you perform a personal service must be spent on real property trades or businesses (this includes W-2 jobs and small businesses). If you work 2,080 hours as a 9-5er W-2 suit, you will need to work 2,081 hours in real estate. Sure, no one wears suits anymore, but you get it.

If you meet these two, you are what the IRC refers to as a qualifying taxpayer, or what the industry calls a real estate professional. But you are not done! The final step is to demonstrate material participation as a real estate professional in each of your rental activities unless formally elected to group all activities as one (more on the 1.469-9(g) election in a bit).

You might sense a small circular reference, and while technically there isn’t one, the two-step process can be practically tricky. Ok, here we go-

Grouping Real Estate Activities for 750 Hours Test

There are two issues at play here, and it is important to understand the seemingly subtle differences. You can group all your real property trades or businesses together for the 750 hours material participation test. Please do not confuse this with the formal election to treat all your rental properties as a single activity to satisfy one of the seven material participation tests. These groupings are very much different.

The next two pages are a bit nutty, so please buckle up.

You could have multiple sources of qualified material participation hours from time spent on your rental properties directly, to time spent as a real estate broker, to time spent as a home remodeler. Specifically, you spend 98 hours on your sole rental property, 120 hours as a real estate broker and you also spend 550 hours remodeling homes. This is a total of 768 hours. With reference to our recently stated basics, you are now over the first of three hurdles to leverage the real estate professional status.

There is a gotcha, and it might be a big one with short-term rentals with an average guest stay of 7 days or less. Temporary Treasury Regulations 1.469-1T(e)(3) reads-

(3) Rental activity—(i) In general. Except as otherwise provided in this paragraph (e)(3), an activity is a rental activity for a taxable year if

(A) During such taxable year, tangible property held in connection with the activity is used by customers or held for use by customers; and

(B) The gross income attributable to the conduct of the activity during such taxable year represents… amounts paid or to be paid principally for the use of such tangible property.

(ii) Exceptions. For purposes of this paragraph (e)(3), an activity involving the use of tangible property is not a rental activity for a taxable year if for such taxable year-

(A) The average period of customer use for such property is seven days or less;

Read those last two sentences again. Are we telling you that a short-term rental with an average guest stay of 7 days or less is not considered a rental activity? Not even a real property trade or business? No, but the regulations are.

Oh, and so are the courts.

In Bailey v. Commissioner, Tax Court Memo. 2001-296, and again in Bailey v. Commissioner, Tax Court Summary Opinion 2011-22, which are different people with different facts but the same problem- the court used a literal interpretation of “the average period of customer use for such property is seven days or less” and stated that the activity was not a rental activity, and therefore those hours did not count as material participation.

The logic in both Tax Court cases is flawed since they relied upon the formal 1.469-9(g) election to group all rental activities into one activity for the primary purpose of demonstrating material participation. However, grouping activities for the 750 hours test does not rely on the formal election to group rental activities. We are getting a bit into the weeds.

The bad news is that your time spent on short-terms rentals with an average guest stay of 7 days or less does not count towards the 750 hours. The good news is that these short-term rentals are not considered passive activities and sidestep passive loss limitations. However, if you have a mixed bag of real estate investments, this flawed Tax Court logic could become problematic.

Sidebar: Keep this 7 days or less thing in mind. Also, keep in mind that rental properties are presumed to be passive. Therefore, the basis of the short-term rental loophole is that it is not a rental activity because of the 7 days or less average guest stay. More on that in a bit in our short-term rentals section.

If you cannot get enough, here is a contradicting blurb from Chief Counsel Advice 201427016–

whether a taxpayer is a qualifying taxpayer within the meaning of section 469(c)(7)(B) and Treas. Reg. § 1.469-9(b)(6) depends upon the rules for determining a taxpayer’s real property trades or businesses under Treas. Reg. § 1.469-9(d), and is not affected by an election under Treas. Reg. § 1.469-9(g). Instead, the election under Treas. Reg. § 1.469-9(g) is relevant only after the determination of whether the taxpayer is a qualifying taxpayer.

Let’s break this down. IRC Section 469(c)(7)(B) refers to the 750 hours requirement. The Treasury Regulations 1.469-9(g) refer to the formal election to group all your rental activities together as a single activity for material participation testing. The IRS’s chief counsel is disagreeing with the Bailey decisions. Nice!

In other words, the IRS clarified their version of chicken and egg. The formal election under Treasury Regulations 1.469-9(g) to group rental activities together is typically considered after qualifying as a real estate professional. If you cannot or choose not to elect your rental properties under the 1.469-9(g) regulations, it should not be used as a wedge to unravel your grouping of all real property trade or businesses for the sake of the 750 hours test.

Tilt!

Could you make a reasonable argument that you are relying on Chief Counsel Advice 201427016? Perhaps.

Being a Licensed Real Estate Agent

You do not have to be a licensed real estate agent or broker to be considered participating in a brokerage trade or business. However, a mortgage broker is not considered participating in a real estate trade or business. Chief Council Advice 201504010 states-

Webster’s Dictionary defines “real estate” as “property consisting of buildings and land; the business of selling land and buildings,” and defines “brokerage” as “the business of a broker” or the “broker’s fee or commission.”1 Webster’s defines a “broker” as “a person who helps other people… to buy and sell property.”2 Accordingly, the common and ordinary construction of “real property brokerage” for purposes of § 469(c)(7)(C) involves bringing together buyers and sellers of real property. This definition of “real property brokerage” does not include the brokerage of financial instruments.

Therefore the “financing” of real property such as by bringing together lenders and borrowers is not a real property brokerage trade or business within the meaning of §469(c)(7)(C).

Webster? Really?!

In Agarwal v. Commissioner, Tax Court Summary 2009-29, the IRS attempted to argue that an agent was not a licensed “broker” and thus could not be involved in a brokerage trade. Come on, IRS?! The Tax Court also relied the Webster definition of the term “brokerage” and found in favor the real estate agent.

Since obtaining a real estate license is a straightforward process with very few barriers to entry, WCG CPAs & Advisors recommends being licensed for two reasons. It buttresses your overall material participation argument, and you might have access to additional resources to help you with real estate investment (and you might save a few bucks on commissions too).

Hours Worked for a Real Estate Agent

IRC Section 469(c)(7)(D)(ii) and Treasury Regulations Section 1.469-9(c)(5), state that the employee must own at least 5% of the real property trade or business for the hours to count toward the real estate professional tests. As such, if you are a receptionist for a real estate developer, you cannot use those hours to satisfy the 750 hours test.

Material Participation Time Logs

There is a ton of chatter about time logs. Spreadsheets with dropdowns, conditional formatting, and built-in pivot tables. Neat. So much effort is spent on the right data that people lose sight of four fundamentals-

Your time log must be done in real-time, or what the IRS considers contemporaneous. This is usually not a huge deal but it is surprising how many court cases mention that the records were not kept in real-time.

Next, your time log must highlight not just your time, what you did and the location, it must also contain the time spent by others on your rental activities. This demonstrates your exhaustiveness or completeness in recording all time spent, not just yours.

Next, your time log must appear credible. To support credibility, you will likely need to recall details surrounding the time or moments spent. You will also need to be reasonable. In Escalante v. Commissioner, Tax Court Summary Opinion 2015-47, the rental property owner listed hundreds of hours for writing checks and reviewing mortgage statements. The Tax Court considered how long it would take them to write their own checks based on their own experience of daily life.

Finally, your time log must be corroborated with other transactions or by disinterested third parties. You claim that you spent 6 hours replacing a toilet, and you also demonstrate two separate trips to Lowe’s with receipts. The first is the toilet. The second has all the crud that you forget to get the first time. Perfect! However, in Pourmirzaie v. Commissioner, Tax Court Memo 2018-26, the rental property owner’s time log showed her being at the rentals every single Saturday performing “weekly cleaning and repairing” work. Unfortunately, her bank and credit card statements showed purchases in other locations besides her rental properties. Oops.

Sidebar: Frankly, the fancier the design of your time log with colors and fancy charts the more likely it is fabricated. Sure, that is not fair, we get it, but adding a bunch of bells and whistle to an otherwise simple time log is like putting lipstick on a pig (pun intended for you passive income generator types). Keep it simple. Support your entries. Done.

This is akin to a mileage log. It is a common misconception that just a mileage log is all you need to defend your automobile expenses. Not true. You also need corroboration such as service receipts from your dealership or Jiffy Lube supporting beginning and ending odometer reads.

Is a time log always required? No. Treasury Regulations Section 1.469-5T(f)(4) reads-

(4) Methods of proof.
The extent of an individual’s participation in an activity may be established by any reasonable means. Contemporaneous daily time reports, logs, or similar documents are not required if the extent of such participation may be established by other reasonable means. Reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative summaries.

Is this suggesting that a written log is not needed if participation can be established by other means? Yes. But be careful!

Here is a win for the real estate investor. In Birdsong v. Commissioner, Tax Court Memo 2018-148, the taxpayers did not maintain contemporaneous records but testified credibly to their activities. Here is a blurb from the ruling-

Petitioners testified credibly and in detail about petitioner wife’s active and extensive management of their rental properties. Furthermore, petitioners presented detailed spreadsheets that reflected petitioner wife’s rental management activities exceeded the 750-hour requirement. We find petitioners’ narrative summary and thorough time logs convincing because petitioners owned numerous rental units that petitioner wife operated alone. See Hailstock v. Commissioner, (holding that the taxpayer’s credible testimony regarding time spent operating multiple properties alone satisfied the section 469(c)(2) requirements). Petitioners’ testimony is further buttressed by petitioner wife’s thorough time-keeping as well as the receipts and invoices petitioner wife produced to corroborate her time logs.

On the basis of petitioners’ testimony and the record as a whole, we conclude that petitioner wife, pursuant to section 469(c), materially participated and is a real estate professional. Accordingly, petitioners’ loss attributable to their rental real estate is not limited by the passive activity loss rules of section 469.

But the Tax Court also gave a little spanking in a footnote-

Although we caution petitioner wife to construct more strictly contemporaneous time logs for her future endeavors, we find her credible testimony and time logs to be a “reasonable means” of proof. See sec. 1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988).

Take the win! At the risk of de-emphasizing time logs, recall that in Hailstock v. Commissioner, Tax Court Memo 2016-146, the rental property owner did not keep a log with specific hours. The Tax Court accepted her narrative and stated “we find petitioner’s narrative summary convincing because she owned numerous rental properties and conducted her business as a “one-man operation” without being otherwise employed.”

Keep a time log please!

Spouse Participation

There is a difference between the 750 hours requirement and material participation in each rental property or as a group if formally elected. For the 750 hours, you cannot combine your time with your spouse. At least one must qualify on their own.

However, and conversely, your material participation in an activity, such as a rental property, includes your spouse’s material participation. This applies even if your spouse did not own any interest in the activity, and you and your spouse do not file a joint tax return for the year.

What does this mean? Let’s say one spouse is a real estate agent, and the other spouse does all the work on the rental properties directly and satisfies the material participation tests. The real estate agent spouse is truly the qualified taxpayer, or what the industry calls the real estate professional, and materially participates in the rental activities vis-a-vis the other spouse.

Material Participation Hours

We discussed a lot of the time that does not count. Let’s come full circle and discuss what time does count as a general concept. Any work you do in connection with an activity in which you own at least a 5% interest is treated as participation in the activity. Some of the activities that count towards your hourly requirements include collecting rent, bookkeeping advertising, maintaining legal compliance, safety reviews, inspections, decorating, tenant approval, contractor supervision, procuring insurance, paying taxes, and actual hands-on maintenance.

Here is a list from IRS Notice 2019-7 with respects to rental activities being considered a trade or business as applied to IRC Section 199A–

• (i) advertising to rent or lease the real estate;

• (ii) negotiating and executing leases;

• (iii) verifying information contained in prospective tenant applications;

• (iv) collection of rent;

• (v) daily operation, maintenance, and repair of the property;

• (vi) management of the real estate;

• (vii) purchase of materials; and

• (viii) supervision of employees and independent contractors.

Regulations 1.469-9(g) Election

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.

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.

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.

Material Participation Time Summary

We chopped a lot of wood as they say. Here are some takeaways-

• Investor and research times does not count. Travel time might count depending on your facts. Acquisition time might count if you complete the purchase (convert investor hours to acquisition hours).

• You can group your real estate trades or businesses together to achieve the 750 hours test for real estate professional. This time cannot be split between spouses, however.

• Short-term rentals with average guest stays of 7 days or less cannot contribute to the 750 hours test since they are not deemed rental activities. This can be good or bad.

• While some Tax Court cases have synthesized material participation by the shear breadth of a real estate investor’s gaggle of rentals, a time log is the best option. It must be credible and reasonable, and corroborated with other evidence.

• You might need to aggregate your rental properties into one activity to reduce the material participation hurdle for each rental. However, this formal election under Treasury Regulations 1.469-9(g) has significant downsides and cannot be easily revoked.