Material participation - proof to collect

Tax, SDIRAs & Cost Segregation
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Material participation - proof to collect

Anna Thanopoulou
Member since 2024 · 2 posts · 5 votes

Hi everyone,

I have a few questions around material participation for an STR:

1) Activities that count: does anyone have a list of things we know for sure count (eg based on court cases?) Do home improvement activities count? Does marketing count? Do activities prior to launch count or only operations?

2) Time spent by others: to qualify for the test "100 hours and nobody spent more time", how do we track the time spent by others and what proof would be required in the event of an audit?

3) Grouping properties: specifically, can we group activities across two properties we purchased and placed in service this year - one in the US and another one overseas. Same owners, same management (self managed), both STRs. Can we group our hours across them or does international not count?

Many thanks in advance

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  • Katie RippBusiness Member
    Accountant · Scottsdale, AZ · Member since 2020 · 31 posts · 38 votes
    1y

    Hi Anna!

    1) I'll put the summarized list of MP activities at the end, but generally speaking the way to think about it is: "Is this activity/task essential for the operations of the STR? If I don't do this task, the property would no longer be operational" -- so something education or networking wouldn't be material participation hours.

    To answer your question though, yes home improvement and marketing counts. Activities prior to launch, but after you have purchased the property, also count.

    2) I'd recommend reaching out to the other individuals that work on the property and ask them for an email or time log of their hours on your property. If you get audited, this will be good to have on file.

    3) That's tricky, the dash 4 grouping election is based on facts and circumstances. I'd want to know more information to make a good recommendation, but it sounds like you would have a strong argument if everything else is the same except for location.

    MP tasks

    Tenant Management:

    • Showing properties, screening applicants, and preparing leases
    • Welcoming tenants and addressing inquiries
    • Collecting rent and managing evictions

    Property Maintenance:

    • Cleaning, repairs, and inspections

    Administrative & Marketing:

    • Supervising staff, purchasing supplies, and promoting rentals (ads and website)
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  • Jason MalabuteBusiness Member
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 899 votes
    1y

    1. Activities That Count

    To meet the material participation criteria, you must log your hours in a detailed and ongoing logbook throughout the year. This log should include:

    • The date of activity

    • The property worked on

    • Specific activities performed

    Examples of activities that typically count include approving tenants, setting lease terms, handling repairs, and other hands-on operational tasks directly related to managing the property. Marketing and home improvement activities may count as well, provided they are directly tied to property operations.

    2. Time Spent by Others

    This ties back to keeping a logbook. Document the time you spent on the property compared to others, especially if you’re trying to qualify under the “100 hours and more than anyone else” test. Ensure your records include details of any hired help and the tasks they performed. This log will be invaluable in case of an audit.

    3. Grouping Properties

    While I’m not an expert in international tax law, my understanding is that you can group all your properties together for material participation purposes. However, if one property is overseas, there might be additional considerations to factor in. Generally, grouping allows you to count all your hours collectively toward the 500-hour threshold, simplifying the qualification process for multiple properties. I recommend consulting a tax professional for confirmation on how international properties are treated in your specific case.

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