Material participation tests activities

[Wayne Lester]

What activities qualify for the material participation tests for making your short term (<7 day on avg stay) active instead of passive income/loss? I'm taking the "I contributed 100 hours and nobody contributed more time" approach and logging everyone's hours who is contributing (mine, my spouse/business partner, my property manager and other contractors). Also, do my spouse/business partner and my hours count together or separate for the tests? I hear (from the internet) that things like travel to/from the property, preparing financial statements, preparing taxes, and general "investor activity" in my case wouldn't count but I wanted more opinions. Does online shopping for furnishings count, and how do I prove that one? What about interviewing cleaners? Time spent arguing with Home Depot about how my dryer still isn't here after 3 attempts of delivery without it even on the truck? Interior design conversations with my spouse/business partner, and how do I prove?

Background: My spouse and I bought it first investment property this year! I want to offset my W2 income this year with all the, hopefully, active losses from setting up, furnishing, and bonus depreciation in the first year. We are currently furnishing it and will be placing it on short term rental platforms like Airbnb and VRBO. It will be run as a less than 7 day in average stay. We will handle the bookings, communication with guests and contractors, pricing, etc. from where we are out of state (8hr drive). My mother-in-law is our in person property manager for if something goes wrong, emergency guest communication, receive packages and mail, etc.

Thanks in advance advice! I'll consider it not legal nor tax advice :)

[Michael Plaks]

@Wayne Lester

Travel time is highly debatable. The courts have been inconsistent in their rulings on travel time, and more often than not travel time was DISallowed. I would include travel time on my log, but would not depend on it to clear the required number of hours threshold. In other words, you need to have enough hours without counting travel hours.

In your case in particular, your travel also smells like family visits, so it makes it even less likely to be allowed.

Preparing financial statements and taxes does not count, there's no debate on this one. 

Business discussions between spouses technically qualify but, as you mentioned, proving the time will be a challenge. It needs to be documented and be reasonably minor compared to all other qualified time. In the end, your presentation has to be believable when explained to a stranger such as an IRS auditor or a judge.

@Gabriel Kinser  Any time tracking app will do, including Google calendar, as long as you can export the data into a printable format. The key is to have enough details, as in "starting 10:20 am: 1hr 45 min replaced the faucet in the upstairs bathroom + 15 min cleanup" instead of "2 hrs work on property."  The other key is to record it on the same day ("contemporaneous log") as opposed to reconstruction at the time of an audit.