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Level 4
posted Feb 20, 2022 7:06:56 PM

How to determine the material parcitipation

My husband is a real estate agent and he is managing the 3 rental properties that we have. When I am filling out the rental portion, the following question pops up:

"

What Material Participation Means for Real Estate Professionals

If you're a real estate professional you can deduct all of your losses from your rental properties if you can prove that you materially participate in their management. It's important to keep records for all your activities.

You are materially participating if:

- More than half of your personal services are provided for your real estate business, and

- You spend more than 750 hours each year on each property"

 

To me, that "more than 750 hours each year on EACH property" does not make sense.  750 hours means about 18 weeks of full-time hours (40 hours a week). And that is for ONE property? Anyone can confirm?

 

I was also trying to google, and got different answers:

"Tests for Material Participation

To materially participate in a real property trade or business, the taxpayer must be involved in the operations of the activity on a regular, continuous, and substantial basis. The seven tests that measure this are:

  1. The individual participates in the activity for more than 500 hours during the tax year.
  2. The individual’s participation in the activity for the tax year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for the year;
  3. The individual participates in the activity for more than 100 hours during the tax year, and the individual’s participation in the activity for the tax year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for the year;
  4. The activity is a significant participation activity for the tax year, and the individual’s aggregate participation in all significant participation activities during the year exceeds 500 hours;
  5. The individual materially participated in the activity for any five tax years (whether or not consecutive) during the 10 tax years that immediately precede the tax year;
  6. The activity is a personal service activity, and the individual materially participated in the activity for any three tax years (whether or not consecutive) preceding the tax year; or
  7. Based on all of the facts and circumstances, the individual participates in the activity on a regular, continuous, and substantial basis during the year."

Does anyone have any idea?

0 7 4451
1 Best answer
Level 15
Feb 21, 2022 7:39:29 AM


@tianwaifeixian wrote:

Hope TT has a way for us to report this issues.


I actually did report this a little while ago. Thanks!

7 Replies
Level 15
Feb 20, 2022 7:39:02 PM

The 750 hours (and more than 50% of work-related time) is the requirement to qualify as a real estate professional.

 

Once you qualify as a real estate professional, then the rental properties in which you materially participate are not subject to the passive activity loss rules.

 

The last section of your post sets forth the tests for material participation.

Level 4
Feb 21, 2022 6:29:07 AM

Thanks for your reply. My question here is more to the 750 hours for EACH property- We have 3 properties. Like I mentioned, 750 hours translates to 18 weeks full time. We have 3, which means it translate to 54 weeks full time- but you only have 52 weeks /year. This rule does not make sense to me. I know some ppl have like 7 rentals of their own to manage. If we go by this 750 hours EACH property, then if no one can pass that rule if they own more than 2 properties... Hope I explained it clearly...

Level 15
Feb 21, 2022 6:38:06 AM

@tianwaifeixian 

 

It is not 750 hours for each property. 

 

To qualify as a real estate professional, it is 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

 

See https://www.irs.gov/publications/p925#en_US_2021_publink1000104592

Level 4
Feb 21, 2022 7:06:47 AM

THat's what I thought. But obviously, that is NOT what Turbotax has. That's why I am confused. Please see screenshots below:

 

Level 15
Feb 21, 2022 7:15:28 AM

That should read, "You are a real estate professional if:". 

 

Further, it is 750 hours in real estate trades or businesses to qualify, not 750 hours on each property.

 

Some of the On Demand Tax Guidance is inaccurate.

Level 4
Feb 21, 2022 7:27:26 AM

Thanks! That's what I thought. Never expect TT to be wrong though. Hope TT has a way for us to report this issues.

Level 15
Feb 21, 2022 7:39:29 AM


@tianwaifeixian wrote:

Hope TT has a way for us to report this issues.


I actually did report this a little while ago. Thanks!