How do I get Turbo tax to classify me as a material participant in a rental property?

[elel]

How do I get Turbo tax to classify me as a material participant in a rental property?

[RobertB4444]

TurboTax will ask if you actively participated in the rental.  The answer is yes if you

• own at least 10% of the property
• Make major management decisions for the property

Tell TurboTax that you're an active participant and it will structure the rental for you.

@elel 

[elel]

I did say that I was an active participant, but how do I say I was a material participant?

[RobertB4444]

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.

@elel 

[elel]

Thank you, Robert. To clarify, I cannot be a material participant unless I am a real estate professional.

[DawnC · Accepted solution]

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.

[elel]

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?

[AmeliesUncle]

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@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.

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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.

[rwheelwr]

I am havI am having the same issue.

[PatriciaV]

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.

@rwheelwr 

[MCSmith1974]

Issue

My 2024 tax return was incorrectly limited because TurboTax Online automatically classified my self-managed rental property as a passive activity. Although I materially participate in all aspects of managing, maintaining, marketing, and leasing the property, etc., the software only allows NON-PASSIVE classification through the Real Estate Professional path, which requires 750 hours and more than half of one’s working time in real-estate trades. As a result, it applied the $25,000 passive activity loss limitation and generated Form 8582, restricting the amount of rental losses I could deduct and carrying the remainder forward, even though IRS rules permit full deduction for materially participating landlords.

Summary of Issue

I discovered a structural limitation in TurboTax Online (Premium / Live Assisted) regarding the classification of rental real-estate activities under IRS §469.

TurboTax Online currently allows non-passive (material participation) treatment only when a taxpayer selects the Real Estate Professional path. However, under IRS Publication 925, material participation and real-estate-professional status are distinct tests:

• Material participation (§469(h)): Involvement on a regular, continuous, and substantial basis (e.g., personally managing, maintaining, and operating the property).

• Real-Estate-Professional (§469(c)(7)): 750+ hours and more than half of total working time in real-property trades or businesses.

A taxpayer can materially participate in a rental activity and therefore be non-passive without meeting the real-estate-professional thresholds.
TurboTax Online merges these two separate IRS standards into a single workflow, meaning:

• Users who materially participate but are not real-estate professionals are automatically classified as passive,

• Form 8582 (Passive Activity Loss Limitations) is generated unnecessarily, and

• Legitimate current-year losses are partially or fully disallowed and carried forward, contrary to IRS rules.

This design inflates taxable income and misrepresents compliance for taxpayers who self-manage their rentals (e.g., single-property landlords who do all maintenance, leasing, and management work).

 

Question

Can TurboTax confirm whether the Online product will be updated to allow non-passive (material-participation) treatment for rental activities without requiring the taxpayer to select “Real Estate Professional” status?

If not, can TurboTax provide an official recommendation for users who materially participate but are not real-estate professionals — specifically, whether they must use TurboTax Desktop Home & Business to ensure correct classification and eliminate Form 8582?

 

Closing

I would appreciate clarification or documentation confirming how TurboTax intends to handle this distinction so that materially participating landlords can file accurately under §469(h) without being forced into the §469(c)(7) real-estate-professional election. 

[MCSmith1974]

Basically, TurboTax Online misclassifies self-managed rental properties as passive activities unless the taxpayer qualifies as a Real Estate Professional or operates a short-term rental. This means that even landlords who materially participate—personally managing, maintaining, and operating their properties—are treated as passive investors. As a result, their rental losses are not only limited by the $25,000 phase-out but also suspended and effectively unusable, because the software disqualifies them from deducting those carryforward losses against active income in future years. This misapplication conflicts with IRS Publication 925 (§469(h)), which allows materially participating landlords to classify their rentals as non-passive and fully deduct legitimate losses without meeting the stricter Real Estate Professional requirements.

[Gideon423]

Could we bump this thread alive again? Basically this very issue will force me not to use TurboTax this year when I have been using it for over 20 years. please help, intuit!

[AmeliesUncle]

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@Gideon423 wrote:

Could we bump this thread alive again? Basically this very issue will force me not to use TurboTax this year when I have been using it for over 20 years. please help, intuit!

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What is your actual question?  Material Participation in a rental property doesn't automatically make it non-passive.  What is your problem and why do you think TurboTax isn't doing something correctly?