You can materially participate without being a real estate professional, and vice versa. The tests are different. Most landlords are active participants, but not material participants. How much you can deduct is based on how much you're involved with managing your properties.
• If you are materially participating in managing your property, you may be able to deduct all of your losses, however...
• The amount you can deduct can be limited based on your level of involvement with each property
Active Participation Rules - Most landlords; passive activity rules apply
Material Participation Rules - The main thing with material participants is that the rental activity is considered a business, so the passive activity rules do not apply.
TurboTax will ask if you actively participated in the rental. The answer is yes if you
Tell TurboTax that you're an active participant and it will structure the rental for you.
I did say that I was an active participant, but how do I say I was a material participant?
Ah, TurboTax has those questions set up to classify you as real-estate professional. In order to demonstrate material participation in a real estate activity and have it be a business instead of rental activity you have to spend more than 50% of your work time in real estate related activities and have more than 750 hours in real estate activities for the year. If you qualify for both of these then you qualify as a real estate professional and the rental activity is a business and not a passive activity.
When you start the rental property TurboTax will ask if you are a real estate professional and ask about your participation in real estate activities. If you can answer yes to both of the questions then you'll be classified as a real-estate professional and all of your rental activities will not be shown as passive income.
Thank you, Robert. To clarify, I cannot be a material participant unless I am a real estate professional.
You can materially participate without being a real estate professional, and vice versa. The tests are different. Most landlords are active participants, but not material participants. How much you can deduct is based on how much you're involved with managing your properties.
• If you are materially participating in managing your property, you may be able to deduct all of your losses, however...
• The amount you can deduct can be limited based on your level of involvement with each property
Active Participation Rules - Most landlords; passive activity rules apply
Material Participation Rules - The main thing with material participants is that the rental activity is considered a business, so the passive activity rules do not apply.
Thank you Dawn for your response. Now, the question is how do I get Turbo tax (using online TurboTax premium") to classify me as a material participant in a rental property without classifying me as a real estate professional?
@DawnC wrote:Material Participation Rules - The main thing with material participants is that the rental activity is considered a business, so the passive activity rules do not apply.
No, Material Participation does NOT mean the the passive loss rules don't apply.
@elel If you are using the online version, I am unsure where to indicate Material Participate if you are not seeing it. However, let's back up to see if it matters. Do you have a reason to indicate Material Participation? Is this a short-term rental (usually average rental period of 7 days or less)?
If you are not a Real Estate Professional and if this is not a short-term rental, I can't think of how claiming Material Participation will affect anything on the tax return.
As RobertB4444 stated earlier, the questions about material participation appear at the beginning of the Rental Property topic in TurboTax. You must answer yes to these questions in order for the program to consider that you materially participate.
But as AmeliesUncle discussed, if real estate is not your main business and the property is not a short-term rental, material participation will have no effect on your taxable income.