We are closing on a property on December 19 , 2025 and hoping to hit the 100 hour material participation rule to utilize cost segregation + depreciation for 2025 before year end to use this for 2025 tax year.
Stakes are a bit high ($5m property) and this is our first potential STR (we have several commercial properties).
- is that enough time to reasonably hit 100 hours material participation? - I have read that husband + wife time can be combined (I.e 50 hours each running simultaneously while we market / clean / set up accounts , etc etc) - is this accurate? If so - could do 10 5-6 hour days each
- we would try to get at least 1-2 stays completed at 1-2 nights each with air bnb bookings
- if the seller is OK closing on the 19th but wants to stay a bit longer - could we do a 7 night stay for them after closing if they book direct with us?
- just want to confirm - material participation does not include time worked prior to us closing on the property and putting it into service?
Congrats on the upcoming closing! With such a tight timeline and a high-value STR, it's really smart to run all of this by a tax expert. The rules around material participation, combining spouse hours, placing the property into service, and what counts as a legitimate stay can get pretty technical, especially this close to year-end. A CPA who specializes in STRs will be able to walk you through what's actually possible and make sure you're set up correctly.
Notice this is for an individual, they are not adding 2 owners hours together.
A cost segregation study itself does not have material participation rules; rather, material participation determines how you can utilize the accelerated depreciation losses generated by the study to offset different types of income.
Without material participation, the losses are considered "passive" and can generally only offset other passive income. With material participation, the losses can be used to offset "active" income like W-2 wages or business profits, which is a major benefit for real estate investors.
For material participation to allow active loss deductions, the activity must first be classified as a trade or business, not a standard rental activity. This generally means the average guest stay in the property must be 7 days or less (e.g., a typical Airbnb/VRBO).
The 7 Material Participation Tests
If the 7-day rule is met, you must then satisfy at least one of the seven IRS material participation tests during the tax year. The most common tests for property owners include:
• 500-Hour Test: You participate in the activity for more than 500 hours during the year.
• Substantially All Participation Test: Your participation constitutes substantially all of the participation of all individuals involved in the activity (including non-owners like a cleaning service).
• 100-Hour and More Than Anyone Else Test: You participate for more than 100 hours, and no other single individual (owner or non-owner) participates for more hours than you do.
• Significant Participation Activity (SPA) Test: The activity is a significant participation activity (more than 100 hours), and your aggregate participation in all SPAs during the year exceeds 500 hours.
Activities That Count Towards Hours
Time spent on the following activities generally counts toward material participation hours:
• Collecting rent
• Advertising and marketing the property
• Screening tenants and guests
• Negotiating lease/rental agreements
• Performing or supervising repairs and maintenance
• Bookkeeping and legal compliance
• Guest check-ins/check-outs and communication [18]
Importance of Documentation
The IRS heavily scrutinizes material participation, so it is vital to keep meticulous, contemporaneous logs of your time and activities.
It is recommended to consult with a qualified real estate CPA or tax professional to ensure you meet all the requirements and properly implement the tax strategy. You can also find detailed guidance in IRS Publication 925 and the IRS Cost Segregation Audit Techniques Guide.
100% you need to consult with your CPA. I have found many CPA's with some varying opinions on these questions. As you mentioned the stakes are high and you will want the full backing of an experienced CPA to make sure you check all the boxes and get the benefit.
@Phillip B., congrats on the soon-to-be acquisition! You need to consult an REI-savvy CPA about this and get some "official" advice that is backed by documentation. The forums are a great place to meet people and bounce ideas back and forth but this is a higher level conversation that needs to happen between you and your trusted tax advisor.
If you don't have one, I'm happy to share the list my bookkeeping firm recommends (all REI-savvy since 100% of our clients are REIs).
Congrats on the upcoming closing! With such a tight timeline and a high-value STR, it's really smart to run all of this by a tax expert. The rules around material participation, combining spouse hours, placing the property into service, and what counts as a legitimate stay can get pretty technical, especially this close to year-end. A CPA who specializes in STRs will be able to walk you through what's actually possible and make sure you're set up correctly.
Congrats on the closing. There’s 7 material participation tests and you only need to meet one of them.
You’re likely to want to use the substantially all of the activity test which is more subjective.
Additionally, you’re going to need at least 2 stays and for them to be completed in the calendar year.
I would recommend working with a cpa ASAP. A $5m property could be very significant in terms of offsetting income.
@Phillip B., great questions and you are thinking about the right things.
You don't need 100 hours to meet the material participation for the rest of the year if you plan correctly. If you want to meet 100 hours, from a tax perspective, yes, it is possible to hit 100 hours of material participation even with a December 19 closing. It requires intentional and well documented work. Only the hours you spend after the property is placed in service will count. That means it must be furnished, cleaned, photographed, listed, and available for rent. Once it is in service, all operational work you do can be included.
Husband and wife hours can be combined. The IRS treats both spouses as a single taxpayer for material participation. If each of you is doing real work like cleaning, furnishing, marketing, setting up systems, handling bookings, and preparing the property, your combined hours count.
Having one or two guest stays helps because it shows the property was truly in service before year end.
Allowing the seller to stay after closing is fine as long as it is a real booking at fair market value and the property is already available to the public.
You are also correct that any work done before closing or before the property is in service cannot be included in your material participation hours.
