Material Participation

[Kram BergGold]

Test two says, the owner's activity must "constitute substantially all of the participation in the activity including participation by non owners". The property in question was managed by the owner (did not spend 100 hours on this endeavor) but there were two repairs and a land survey done by others. Are these three events enough to make it so the owenr can't meet the substantially all test?

[Roland Slugg]

I don't think so. The intent of the rule you mentioned is to allow a current deduction for a loss activity where the owner is the only person who devotes time to that activity. The reference to "non owners" means employees or outsiders hired to manage the property or business. The workmen in your case were outside contractors hired by the owner to perform specific tasks.

[Kram BergGold]

Roland

I have thought about what you said and it has made me realize that workers hired to make repairs will usually disqualify the owner form using test 2. If this were not the case, then every high income person with with self managed rental property could deduct their losses on a yearly basis. As we know the passive loss rules were designed to prevent this. To qualify for test 2 the owner probably has to spend 20 hours for every hour someone else spends on the house is my guess.

[joanmcq]

To take the losses if you are over the income restrictions on a rental property, you not only have to pass the material participation rules, but also the real estate pro rules. Its the RE pro rules that will disallow high income taxpayers from taking passive loss deductions. The material participation rule that you state allows a part time Sch C person to qualify to take losses as long as they are the only person running the business as opposed to a sole proprietor whose employee runs everything.

[Kram BergGold]

thanks Joan you are correct

As it was never relevant in my practice, I did not realize that material participation did not apply to rentals.

[joanmcq]

Not too relevant in my practice either, but for my job I am always correcting people on the RE pro. A couple of rentals does not make you a pro, especially if you have another job! I have a bunch of rentals so I know how much time they take and it isn't much even if you do a lot of repairs yourself.