Rental Property Rules – What Is Material Participation?
A client is generally considered to have materially participated in an activity if he or she passes any of the following seven tests:
- The client spent more than 500 hours on the activity during the tax year.
- The client’s participation constituted substantially all of the participation by anyone in the activity for the year.
- The client spent more than 100 hours on the activity during the year, and no one else spent more time.
- The client spent more than 500 hours on the activity in any five of the ten preceding years.
- The taxpayer spent more than 500 hours on two or more activities during the year and more than 100 hours on each of those activities.
- The activity is a personal service activity and the client participated in the activity for more than 500 hours in any three preceding years.
- All the facts and circumstances show that client materially participated in the activity for the year. [Reg. Sec. 1.469-5T(a)].
TOUGH RULE FOR LIMITED PARTNERS: A limited partner is treated as materially participating in a partnership activity only if he or she passes tests 1,4, or 6. As a practical matter, only the first and fourth tests are relevant to rental real estate because it’s not a personal service activity.