Does Cost Analysis, Bookeeping, Budgeting etc Count as Material Participation?

Question

Next week I am planning to do some extensive year end cost analysis on my expenses so I can figure out how much is going towards cleaners, toilet paper, coffee, misc expenses etc. Can I count those hours as Material Participation?

To be clear, this would be for an STR where the goal is to show an active loss (with cost seg/Bonus Depreciation) against W2 income. Thank you

Jon Martin · Answer

Big thanks @Nathan Meeker that is super helpful!

Nate Meeker · Answer

@Jon Martin Unfortunately, most investor "financial" hours do not count unless it is your only job. Other things to consider:

Per the IRS Audit Technique Guide: Travel Time generally should not be considered in computing the hourly tests for material participation, particularly if other factors indicate the taxpayer is not participating in the activity on a regular, continuous and substantial basis. Legislative history provides that "services must be integral to operations". It is somewhat difficult to construe that travel constitutes "services" or "participation" as contemplated by Congress or the Regulations. More importantly, travel is not integral to operations in most cases.

Court case Thomas E. Truskowsky, T.C. Summary Opinion 2003-130 disallowed travel time since he made personal stops along the way.

On the contrary, Leyh v. Commissioner the Tax Court allowed the taxpayer to include time traveling between his home and his rental properties because there was no personal stops and he did all of the work on a regular and continuous basis.

My opinion, it is safer to exclude it, but still keep track of it in case of an audit, they may allow the time spent if it is deemed a reasonable distance and integral to the properties operations.

Sean O'Keefe · Answer

@Jon Martin 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...**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.