Seeking Clarification on Material Participation Rules for STR Tax Loophole

[Mohsen Samadani]

I have some questions about the material participation rules for the STR tax loophole. I would appreciate any insights.

1- In a partnership or LLC, can both partners benefit from this strategy if they invest in the same property? Does having a business partner infringe on the rule of spending more than 100 hours and more than anyone else in the business?

2- If I employ a full-service property manager to handle tasks such as cleaning, maintenance, booking, and guest communication, while I focus on business aspects like property search, renovation, decoration, bookkeeping, and supply procurement, would this still qualify as material participation or could it pose a risk? How does the IRS define the boundaries of material participation and how stringent are they in enforcing these rules?

3- Can I use this strategy and deduct all business expenses if I finance the property with a secondary home loan, or should I only get an investment loan? Does the IRS care about the type of loan I'm using?

[Mohsen Samadani]

Quote from @Account Closed:

Quote from @Mohsen Samadani:

I have some questions about the material participation rules for the STR tax loophole. I would appreciate any insights.

1- In a partnership or LLC, can both partners benefit from this strategy if they invest in the same property? Does having a business partner infringe on the rule of spending more than 100 hours and more than anyone else in the business?

2- If I employ a full-service property manager to handle tasks such as cleaning, maintenance, booking, and guest communication, while I focus on business aspects like property search, renovation, decoration, bookkeeping, and supply procurement, would this still qualify as material participation or could it pose a risk? How does the IRS define the boundaries of material participation and how stringent are they in enforcing these rules?

3- Can I use this strategy and deduct all business expenses if I finance the property with a secondary home loan, or should I only get an investment loan? Does the IRS care about the type of loan I'm using?

1. if you have a partnership then only one of you can pass the 100 hours test. That test is 100 hours and more then anyone else. You will both need to pass the 500 hours test to qualify. 
2. The IRS is very stringent on education and research hours, and have shown in several tax court cases that people who just "manage the manager" will not pass the audit. If you are doing things like renovation and decoration though, you maybe able to argue in court. Keep a detailed time log here and you should be good if it ever got to that point. 
3. IRS doesn't care about the particular loan you are using. 

 Thanks a lot for the reply, that was very helpful.