Material participation hours for STR Tax Loophole

[Arda Bircan]

This post is for the STR investors who are looking to take advantage of the STR tax loophole which allows you to write off paper losses against your active income. There is some confusion about material participation hours.

First off, you need to keep track of your time. You can start counting your hours once the property is under contract. (Not before) The time spent before the property is under contract such as analyzing deals, doing negotiations, research, education hours, traveling, etc do NOT count towards the material participation hours.

[Sean O'Keefe]

@J. Deegan and @Arda Bircan There are technically 7 Tests for Material Participation (but 3 that are most common) -> the individual 500 hour mark, that the activity of the individual is substantially all, and that the individual participates more than 100 hours + no-one else spends more time than them.

Litmus Test: Are your hours integral to the operations

The hours that qualify must be substantially all hours and have a legitimate impact on the rental activities.

Activities that generally count: showing the property for rent, taking tenant applications & screening tenants, preparing & negotiating leases, cleaning & preparing the units for rent, repairs, and improvements, managing the construction, purchasing supplies & materials, inspecting the property, responding to tenant complaints & inquiries, collecting & depositing rents, evicting tenants, writing & placing advertisements, and working on your website

Activities that don't count: education & research, investor-type activities, and travel time
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**This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.