Personal Services to meet Material Participation Test

[Kram BergGold]

I have a client who may be renting a house for short periods of time between 7 days and 30 days. To qualify for Material Participation he has to provide significant personal services. Can anyone give me any guidance as to what constitutes significant personal services?

[TaxGuyBill]

Material Participation does not require significant personal services.


This is from Publication 925:

Material participation tests. You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests.

You participated in the activity for more than 500 hours.

Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity.

You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year.

The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities , under Recharacterization of Passive Income, later.

You materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.

The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor.

Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.

You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Your participation in managing the activity does not count in determining whether you materially participated under this test if:

Any person other than you received compensation for managing the activity, or

Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services).

https://www.irs.gov/publications/p925/ar02.html#en_US_2014_publink1000104581

Significant personal services, such as maid service or meals, would make it go on Schedule C and be subject to Self Employment tax.

[Roland Slugg]

"Material participation" is rarely applicable to real estate rental activities. All that's required in order to qualify to deduct losses of up to $25,000 (subject to the MAGI limit, of course) is that the taxpayer "actively participates" in the activity. In almost all cases anyone owning 10% or more of the PIQ will qualify. (See Code §469(c)(2))

[Kram BergGold]

Tax Guy Bill and Roland

Bill, When dealing with a rental property, before you get the the material participation test you have to pass another test. In my clients case the one we would need to pass is the significant services test.
Roland, if my clients income allowed him to use the active participation rules I would not have asked this question. He makes well over $200,000.

[TaxGuyBill]

To qualify for Material Participation he has to provide significant personal services. Can anyone give me any guidance as to what constitutes significant personal services?

Bill, When dealing with a rental property, before you get the the material participation test you have to pass another test.

Providing significant services isn't a qualifier for Material Participation. Significant services automatically make it a non-rental for purposes of passive losses (no Material Participation required). A taxpayer can be Materially Participating WITHOUT significant services or other exceptions that classify losses as a non-rental activity.

As I mentioned before, significant services would include such things as maid services or meals. That also makes it go on Schedule C, and any profits would be subject to self employment tax.

[Kram BergGold]

Tax Guy Bill

Your response was most helpful. I was kind of afraid that would be the answer. So anything short of a B & B or daily housekeeping does not constitute significant services. I missed this in your first post. I will do some more checking on this but \as I said I am inclined to think you are spot on.