What Time Counts For Material Participation

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

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.

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!)

Time spent acquiring the rental property might count but only qualifying for the 750 hours test as a real estate professional (as defined by the IRS). Time spent searching for a rental property, inspecting the property and other associated acquisition time does not count for material participation. Before you blow up, we do offer an out for short-term rentals but let’s work through the madness first.

Let’s review IRC Section 469(c)(7)(C) of the IRS code 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.

However, it is important to understand the overall umbrella of IRC Section 469. It is titled, “Passive activity losses and credits limited.” It is not about material participation per se. Having said that, IRC Section 469 does discuss material participation to determine if an activity is passive or non-passive. Specifically, IRC Section 469(h) reads-

(h) Material participation defined
For purposes of this section-

(1) In general a taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is-

(A) regular,
(B) continuous, and
(C) substantial.

What are we getting at here? It is easy to throw all this into a material participation passive activity loss real estate professional status stew and think that the word “acquisition” is somehow connected to material participation. It is not.

More importantly, Treasury Regulations Section 1.469-5T starts with-

(a) In general. Except as provided in paragraphs (e) and (h)(2) of this section, an individual shall be treated, for purposes of section 469 and the regulations thereunder, as materially participating in an activity for the taxable year…

From there the regulations list out the seven various tests.

Therefore, and at the risk of stating the obvious, you need an activity to materially participate in. This begs the question- if you wake up and decide to start a business, an activity is now launched and you can start counting your hours. Why can’t you do the same for rental properties?

We must determine when a rental activity starts especially as it relates to material participation. More rules!

Treasury Regulations Section 1.469-1T(e)(3) read-

(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 (or, in the case of an activity in which property is held for use by customers, the expected gross income from the conduct of the activity will represent) amounts paid or to be paid principally for the use of such tangible property (without regard to whether the use of the property by customers is pursuant to a lease or pursuant to a service contract or other arrangement that is not denominated a lease).

Did you read each word? Ah, you’re better for it if you did. What all this nonsense is saying is that you must have a rental property “used by customers or held for use by customer” for your activity to be a rental activity. In other words, you need an asset, the rental property, to be placed in service. Treasury Regulations Section 1.167(a)-11(e)(1)(i) define “placed in service,” and can be summarized as ready and available for occupancy, and held out for rental use through advertising and related efforts.

But there is another wrinkle to all this. Short-term rentals with average guest stay of 7 days or less are not considered rental activities. Huh? Why does this matter?

Let’s go to the regulations! Treasury Regulations Section 1.469-4, titled “Definition of an activity,” reads in part-

(b) Definitions. The following definitions apply for purposes of this section—

(1) Trade or business activities. Trade or business activities are activities, other than rental activities or activities that are treated under § 1.469-1T(e)(3)(vi)(B) as incidental to an activity of holding property for investment, that—

(i) Involve the conduct of a trade or business (within the meaning of section 162);

(ii) Are conducted in anticipation of the commencement of a trade or business; or

(iii) Involve research or experimental expenditures that are deductible under section 174 (or would be deductible if the taxpayer adopted the method described in section 174(a)).

What does this mean? You are considered to have an activity by the mere anticipation of the commencement of a trade or business that is not a rental activity. Therefore, since a short-term rental is not considered a rental activity, you nonetheless have an activity that you can materially participate in without necessarily having the asset (e.g., the rental property) placed in service.

Let’s stop for a moment and consider selling used copiers as your new business. The moment you wake up and start procuring inventory, negotiating contracts, creating marketing materials, hiring a staff or support team of contractors, buying office furniture and equipment, deploying an accounting system, among the myriad of other things business owners do, you are materially participating in your used copier activity.

Why is procuring a short-term rental, signing up with Airbnb or a management company, launching a website or rental listing, shopping for linens and supplies, etc. be any different than your used copier business? It isn’t, right?

Sure, one could argue that your time spent in the examples above might not be regular, continuous, and substantial as required by IRC Section 469(h). Then again, these are squishy terms and open for wide interpretations.

Who could use a summary right about now?

• Acquisition time counts towards your 750 hours for real estate professional status (with a caveat that is coming up).
• Acquisition time for a rental activity does not count towards material participation. Moreover, any time spent until the rental property is placed into service does not count. Make it available as soon as possible, and then paint that wall or install ceiling fans as you market the rental property.
• Acquisition time for a short-term rental does count towards material participation since an STR is not considered a rental activity, but rather a trade or business activity. The used copier scenario.

Here’s the caveat- as explained throughout this book, time spent on short-term rental properties does not count towards your 750 hours for real estate professional status because… and you might have guessed it… STRs are not rental activities nor are they considered real estate activities. Rather, they are like hotels. Operating a hotel does not count towards REPS either.

So, we’ve carved out this little nugget for short-term rentals but we must be mindful of investor time. The following items likely would not count for material participation even with short-term rentals-

• Reading market reports.
• Viewing real estate listings.
• Meeting with a broker or lender.
• Building out spreadsheets to analyze ROI or IRR or some other R.

There are others of course, and there are likely ones that are gray. Ah, the beauty of our tax code!

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.

Material Participation Time Tracking

If you are looking for a way to easily track time, WCG CPAs & Advisors has partnered with REPSLog and you can download their app here-

https://wcginc.com/time

Material Participation Hours That Count

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.