Material Participation In Rental Activities
Discover how material participation in rental activities differs from active participation below. This distinction is important for taxpayers to understand if they own rental properties of any kind.
As noted, material participation is NOT the same as the “ACTIVE PARTICIPATION” rule under which up to $25,000 of losses from REAL ESTATE RENTALS may be allowed. Instead, the following tests determine material participation (only one test needs to be met to qualify a taxpayer as a material participant):
Time Tests
A taxpayer is a material participant in an activity if the taxpayer:
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Participates 500 HOURS OR MORE during the tax year;
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Provides “SUBSTANTIALLY ALL THE PARTICIPATION” in the activity;
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SPENDS MORE THAN 100 HOURS on the activity and nobody spends more time than this on the activity; or
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SPENDS AGGREGATE TIME over 500 hours on all “significant participation activities” (SPA’s)., A SPA is an activity in which the taxpayer spends over 100 hours during the year but cannot meet one of the three other time tests.,
Prior Participation Tests
A taxpayer may be a material participant based on prior participation rather than TIME. The taxpayer may meet either of these criteria:
5. Participate in the activity materially” IN ANY 5 OF THE LAST 10 TAX YEARS: or
6. TAXPAYER is in a PERSONAL SERVICE BUSINESS and WAS a MATERIAL PARTICIPANT IN ANY 3 PREVIOUS TAX YEARS.