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Posted by D. Stussy on April 13, 2008, 10:56 pm
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> For some reason, determining "material participation" leaves me with
> many questions. Hopefully, I can get some opinions to help me. It
> never used to matter because my income was low enough that I could
> deduct my losses under the passive loss rules. Now however I am
> hitting the limitation.
>
> I'll try to be as brief as possible and make my questions yes/no type
> questions to make it easy on anyone who wants to respond.
>
> Facts:
>
> a) My wife is a full time real estate professional doing sales and
> rentals of mostly residential RE, a little commercial as well
>
> b) We own 4 multi-family buildings, which she manages - finding
> tenants, advertising, handling the money, bookkeeping, dealing with
> repair people, etc. Hard to say how much time she spends - when we
> have no vacancies or problems, it is probably 5-10 hours/month or so
> combined for all properties.
>
> c) We purchased a building in 2007 that needed substantial repair,
> much of which we did ourselves (probably 150-200 hours for myself, 50
> hours for my wife, 100 hours for my 16 year old). We hired various
> people to do plumbing and more complicated carpentry, however none
> worked more than the 150 hours I put in.
>
> d) We generally find our own tenants, however we will occasionally
> accept a tenant found by an agency and pay them a commission, however
> we make to decision to take them based on our own income/credit/
> reference standards. We make all decisions on rents, repairs,
> improvements, etc.
>
>
> Questions:
>
> 1) Does the fact that my wife is a full time RE professional
> automatically make all of our rentals meet test 1 "The taxpayer works
> 500 hours or more during the year in the activity."? It's not clear
> what "activity" covers in this context.
Under the original PAL statutes, no. However, a few years ago, there were
special rules for professional RE people added. It's in parallel to the 500
hour rule - which itself is used when MULTIPLE people have an interest in
the activity or its operations.
> 2) Do I have to "group" all the rentals or do I figure out material
> participation for each one separately? Or can I choose?
Separately.
> 3) Test 2 says "The taxpayer does substantially all the work in the
> activity." Tthis is true for all of our rentals, since no one does
> more more work than my wife and I. However, "substantial" is not
> defined and there are no specific hour requirements. Do I meet this
> test?
Yes. There is NO ONE ELSE doing the work.
> 4) Test 3 says "The taxpayer works more than 100 hours in the activity
> during the year and no one else works more than the taxpayer." We
> certainly meet this for our latest property since my time gets
> included in the 100 hours, and no one else worked more. So for at
> least the latest property, we pass the test. Agree?
Doesn't matter. The 100 hour rule is applied when no one person meets the
500 hour rule but everyone together does.
> 5) Test 7 seems to be a more restrictive version of test 3. If you
> meet test 3, wouldn't you automatically meet test 7?
>
> 6) Test 5 states "The taxpayer materially participated in the activity
> in any 5 of the prior 10 years." Does this have the effect that if you
> materially participate for 5 years in a row, you will pass this test
> forever? It would seem in year 6 you pass, in year 7 you pass because
> of years 2-5 and the passing of test 5 in year 6, etc.
No. If you MP'ed in years 1-5 only, you get a pass in years 6-10 only.
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