Material Participation Qualification

[Sammy Marshall]

Hi everyone!

Hope everyone is enjoying their new year. My wife and I are close to closing on our first STR property in Saint Augustine, FL. I have listened to numerous podcasts about being able to prove material participation to use the depreciation of our rental towards our personal taxes. I have a few questions for anyone that might know the answer to any of them:

1) I know you can't use the time spent locating the property towards material participation, but when does that clock start? Can I start counting the hours when we close or even before then?

2) If I am putting this house under an LLC for liability purposes, can I still use the depreciation from a rental under an LLC towards my/my wife's personal taxes?

3) For anyone that has done a cost segregation - how much do they typically cost and would I find someone to do that with a quick google search or is there a better way to find a reputable person to execute the cost seg.?

Thanks in advance for all your help!

Sammy

[Sean O'Keefe]

@Sammy Marshall congrats on closing on your first property!

There are significant grey areas, subject to interpretation, on what activities count toward material participation. For example, what part of pre-purchase activities qualifies and what part does not is controversial. 

1. Litmus Test: Are your hours integral to the operations. The hours that qualify must be substantially all hours and have a legitimate impact on the rental activities.
   1. Activities that generally count: showing the property for rent, taking tenant applications & screening tenants, preparing & negotiating leases, cleaning & preparing the units for rent, repairs, and improvements, managing the construction, purchasing supplies & materials, inspecting the property, responding to tenant complaints & inquiries, collecting & depositing rents, evicting tenants, writing & placing advertisements, and working on your website
   2. Activities that don't count: education & research, investor-type activities, and travel time
2. Qualifying to offset your wife's non-passive income (W-2, 1099, etc.) with rental losses (that may or may not include depreciation expense) has nothing to do with whether or not the investment property is owned by LLC. It is related to several factors, including type of property, material participation, how much non-passive income you make, more things …
3. Don’t google. If you search this forum for “cost segregation”, using the magnifying glass functional in the top right of Biggerpockets on your screen -> go to the “forum” tab, you will get a lot of results where people ask the same question. Here are a few of the Cost segregation study companies our clients have used (and aren’t necessarily partners)

•    DIY Cost Segregation (Self-service)
•    KBKG (Self-service)
•    RECostSeg (Self-service, Hybrid, Human/Engineers)
•    Engineered Tax Services (Human, Engineers)
•    More other people can suggest

If you don’t qualify for “material participation” it may not make sense to do cost segregation and this varies from real estate investor to real estate investor

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This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.