How to meet material participation hours for out of state investors

Member since 2024 · 8 posts · 9 votes

My husband and I are ready to invest in our first vacation property, likely in Florida. We hope to eventually have multiple properties, but want to take our time to learn and make the right decisions with our first rental. I should add it will be a short term rental property.

What adds complexity to our plan, is that we live in Minnesota. We would like for the investment to be treated as active, of course. However, we will likely need a property manager to assist with some facets of running this rental (since we would not live locally) and would primarily market it through platforms such as Airbnb and VRBO to start, (eventually setting up a direct booking process).

Here's our question for those who have experience in STR's or who might be involved in a similar scenario: How challenging is it to meet the material participation hours needed to achieve active status? My husband is a high income W2 earner, and meeting active criteria would put some of our tax dollars back in our pocket. Is it possible to have a property manager who manages some of the property, while I manage the rest remotely? For instance, said property manager manages maintenance issues, problems that arise during bookings, basically anything that needs a physical person at the property, while I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)?

According to what I have read straight from the IRS website and other places, we need to either meet 500 hours, or at least 100 hours and also work more than anyone else on the property. I feel I could definitely meet both of those on my own, as my husband works full-time , and I will be the only person besides the hourly employees stated above that would be accruing hours. However, the one CPA I briefly talked to said the investment would be treated as passive. No real explanation as to why or whether there were exceptions to that.

We are newbies, and don't want to miss out on a great investment and tax savings opportunity, but obviously want to do everything correctly in the eyes of Uncle Sam. Thank you so much in advance for your help.

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Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

Quote from @Annie Anson:

My husband and I are ready to invest in our first vacation property, likely in Florida... a short term rental property.

What adds complexity to our plan, is that we live in Minnesota...

...How challenging is it to meet the material participation hours needed to achieve active status?.. Is it possible to have a property manager who manages some of the property, while I manage the rest remotely? For instance, said property manager manages maintenance issues, problems that arise during bookings, basically anything that needs a physical person at the property, while I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)?

First, do not get upset with the words "likely" or "possibly" - these words are accurate. Yes, I was tempted to type "these words are likely accurate" ;) The reason is because tax rules are very much case-by-case, and your mileage may vary.

Here is an important clue in your particular situation:
...I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)...

Let's count how much time you are going to spend doing what you described. Let's say you spent a month on the initial preparation: cleaning, painting, shopping for furnishings, assembling IKEA furniture and so on. We're possibly (sorry for using the p-word) talking about 200 hours. For the next 10 months (40 weeks) you spend a fairly reasonable 5 hours a week marketing, communicating with guests and your property manager and bookkeeping. Here is another 200 hours. We now have 400 hours in the bag, and hitting 500 is attainable during your first year.

But what if you only spent 2 days visiting this property and from that point on outsourced all work? Yes, you still do online shopping and coordination and so on, but hitting 500 hours in this case becomes far more challenging. Do you see why we accountants say "likely" and "possibly" in every paragraph we write?

If you cannot make 500 hours, then you need to make 100 hours and "outwork" everybody else. Let's say you have a guest every week for 10 months. This is 40 guests. And you use a cleaning lady who spends 5 hours to reset the property for the next guest. Now your cleaner has 200 hours, and you will have to spend at least 201. Is it doable? Well, at least it's much easier to gather 201 hours than 500 hours. But now you have a challenge of documenting both your time AND time of everybody else involved with the property.

Now, to answer your question - is it possible from out of state? Yes, it is, particularly if you undertake the initial preparation and furnishing of the property yourself. But the only way to have a definitive answer and avoid "likely" and "possibly" is to analyze your plan with your own CPA and find ways to boost your hours. Here is how to find such a CPA:
https://www.biggerpockets.com/forums/51/topics/1222774-expla...

You probably (argh, can't help myself) noticed that I was pointedly talking about the initial year. What about the second and third year when you no longer have the labor-intensive initial setup? Actually, you may not need to qualify in the second year. Why? Because your second year is likely (oops, I did it again) to show a net profit instead of net loss. It is your first year when you get the major tax savings windfall due to cost segregation and bonus depreciation. More about the concept of STR tax savings is here:
https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

As to one CPA saying that your losses would still be passive, we cannot comment. Maybe you misunderstood what that CPA said. Maybe they meant a different context. Maybe they were not very good. But now you know.

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Nick Velez
Lender · Member since 2019 · 250 posts · 219 votes
1y
@Annie Anson

Welcome and congrats on taking the first step! Not many people dig too deep on the actual requirements so kudos to you. You definitely want to talk to a different investor friendly CPA that helps their clients with cost seg's, and can articulate exactly what you will need to do to meet the requirements.

I also highly suggest you connect with @Josh Green as well whom not only owns STR's locally, but has a management business. Tax savings are amazing and I have utilized cost segs myself, but you also have an opportunity to make an amazing return on your money in the Tampa Bay market. There is a formula that you must follow if you want to perform, having a realtor who knows the market inside and out and practices what they preach is an absolute necessity.

1 Reply
Sean O'KeefePro Member
CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 870 votes
1y
Quote from @Annie Anson:

My husband and I are ready to invest in our first vacation property, likely in Florida. We hope to eventually have multiple properties, but want to take our time to learn and make the right decisions with our first rental. I should add it will be a short term rental property.

What adds complexity to our plan, is that we live in Minnesota. We would like for the investment to be treated as active, of course. However, we will likely need a property manager to assist with some facets of running this rental (since we would not live locally) and would primarily market it through platforms such as Airbnb and VRBO to start, (eventually setting up a direct booking process).

Here's our question for those who have experience in STR's or who might be involved in a similar scenario: How challenging is it to meet the material participation hours needed to achieve active status? My husband is a high income W2 earner, and meeting active criteria would put some of our tax dollars back in our pocket. Is it possible to have a property manager who manages some of the property, while I manage the rest remotely? For instance, said property manager manages maintenance issues, problems that arise during bookings, basically anything that needs a physical person at the property, while I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)?

According to what I have read straight from the IRS website and other places, we need to either meet 500 hours, or at least 100 hours and also work more than anyone else on the property. I feel I could definitely meet both of those on my own, as my husband works full-time , and I will be the only person besides the hourly employees stated above that would be accruing hours. However, the one CPA I briefly talked to said the investment would be treated as passive. No real explanation as to why or whether there were exceptions to that.

We are newbies, and don't want to miss out on a great investment and tax savings opportunity, but obviously want to do everything correctly in the eyes of Uncle Sam. Thank you so much in advance for your help.

If you have a property manager and live 100s of miles away, it’s unlikely that you meet the material participation requirements to qualify for tax benefits you mentioned.
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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.
[email protected]628-241-0888
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Annie Anson
OP
Member since 2024 · 8 posts · 9 votes
1y
Quote from @Nick Velez:

@Annie Anson

Welcome and congrats on taking the first step! Not many people dig too deep on the actual requirements so kudos to you. You definitely want to talk to a different investor friendly CPA that helps their clients with cost seg's, and can articulate exactly what you will need to do to meet the requirements.

I also highly suggest you connect with @Josh Green as well whom not only owns STR's locally, but has a management business. Tax savings are amazing and I have utilized cost segs myself, but you also have an opportunity to make an amazing return on your money in the Tampa Bay market. There is a formula that you must follow if you want to perform, having a realtor who knows the market inside and out and practices what they preach is an absolute necessity.

Thank you Nick. I appreciate the insight, referrals and advice.
1 Reply
Annie Anson
OP
Member since 2024 · 8 posts · 9 votes
1y
Quote from @Sean O'Keefe:

Quote from @Annie Anson:

My husband and I are ready to invest in our first vacation property, likely in Florida. We hope to eventually have multiple properties, but want to take our time to learn and make the right decisions with our first rental. I should add it will be a short term rental property.

What adds complexity to our plan, is that we live in Minnesota. We would like for the investment to be treated as active, of course. However, we will likely need a property manager to assist with some facets of running this rental (since we would not live locally) and would primarily market it through platforms such as Airbnb and VRBO to start, (eventually setting up a direct booking process).

Here's our question for those who have experience in STR's or who might be involved in a similar scenario: How challenging is it to meet the material participation hours needed to achieve active status? My husband is a high income W2 earner, and meeting active criteria would put some of our tax dollars back in our pocket. Is it possible to have a property manager who manages some of the property, while I manage the rest remotely? For instance, said property manager manages maintenance issues, problems that arise during bookings, basically anything that needs a physical person at the property, while I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)?

According to what I have read straight from the IRS website and other places, we need to either meet 500 hours, or at least 100 hours and also work more than anyone else on the property. I feel I could definitely meet both of those on my own, as my husband works full-time , and I will be the only person besides the hourly employees stated above that would be accruing hours. However, the one CPA I briefly talked to said the investment would be treated as passive. No real explanation as to why or whether there were exceptions to that.

We are newbies, and don't want to miss out on a great investment and tax savings opportunity, but obviously want to do everything correctly in the eyes of Uncle Sam. Thank you so much in advance for your help.

If you have a property manager and live 100s of miles away, it’s unlikely that you meet the material participation requirements to qualify for tax benefits you mentioned.
.
.
.
*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.

Hi Sean,
With all due respect, unlikely meeting the requirements is not very useful information. This leaves a lot of room for interpretation and that is exactly the issue we are having at the moment. So far it sounds like we will just need to verify via a CPA, which is fine, if that is what we need to do. I was hoping some folks might be in a similar situation or had a similar experience and might be able to share. I do appreciate you taking the time to respond regardless.
1 Reply
Sean O'KeefePro Member
CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 870 votes
1y
Quote from @Annie Anson:

Quote from @Sean O'Keefe:

Quote from @Annie Anson:

My husband and I are ready to invest in our first vacation property, likely in Florida. We hope to eventually have multiple properties, but want to take our time to learn and make the right decisions with our first rental. I should add it will be a short term rental property.

What adds complexity to our plan, is that we live in Minnesota. We would like for the investment to be treated as active, of course. However, we will likely need a property manager to assist with some facets of running this rental (since we would not live locally) and would primarily market it through platforms such as Airbnb and VRBO to start, (eventually setting up a direct booking process).

Here's our question for those who have experience in STR's or who might be involved in a similar scenario: How challenging is it to meet the material participation hours needed to achieve active status? My husband is a high income W2 earner, and meeting active criteria would put some of our tax dollars back in our pocket. Is it possible to have a property manager who manages some of the property, while I manage the rest remotely? For instance, said property manager manages maintenance issues, problems that arise during bookings, basically anything that needs a physical person at the property, while I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)?

According to what I have read straight from the IRS website and other places, we need to either meet 500 hours, or at least 100 hours and also work more than anyone else on the property. I feel I could definitely meet both of those on my own, as my husband works full-time , and I will be the only person besides the hourly employees stated above that would be accruing hours. However, the one CPA I briefly talked to said the investment would be treated as passive. No real explanation as to why or whether there were exceptions to that.

We are newbies, and don't want to miss out on a great investment and tax savings opportunity, but obviously want to do everything correctly in the eyes of Uncle Sam. Thank you so much in advance for your help.

If you have a property manager and live 100s of miles away, it’s unlikely that you meet the material participation requirements to qualify for tax benefits you mentioned.
.
.
.
*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.

Hi Sean,
With all due respect, unlikely meeting the requirements is not very useful information. This leaves a lot of room for interpretation and that is exactly the issue we are having at the moment. So far it sounds like we will just need to verify via a CPA, which is fine, if that is what we need to do. I was hoping some folks might be in a similar situation or had a similar experience and might be able to share. I do appreciate you taking the time to respond regardless.
The IRS specifically calls out owner distance from rental and having a property manager as a red flag that owner isn't materially participating. Based on what you said you meet this criteria.

Everyone's situation is different. You may still qualify. Since leveraging this tax strategy could save you significantly on taxes if you do qualify you might want to seek personalized advice, that's tough to get in a public forum, to avoid missing out or getting audited and failing audit.
.
.
.
*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
[email protected]628-241-0888
1 Reply
Zane Cress
Realtor · Athens, GA · Member since 2023 · 201 posts · 104 votes
1y
Quote from @Annie Anson:

My husband and I are ready to invest in our first vacation property, likely in Florida. We hope to eventually have multiple properties, but want to take our time to learn and make the right decisions with our first rental. I should add it will be a short term rental property.

What adds complexity to our plan, is that we live in Minnesota. We would like for the investment to be treated as active, of course. However, we will likely need a property manager to assist with some facets of running this rental (since we would not live locally) and would primarily market it through platforms such as Airbnb and VRBO to start, (eventually setting up a direct booking process).

Here's our question for those who have experience in STR's or who might be involved in a similar scenario: How challenging is it to meet the material participation hours needed to achieve active status? My husband is a high income W2 earner, and meeting active criteria would put some of our tax dollars back in our pocket. Is it possible to have a property manager who manages some of the property, while I manage the rest remotely? For instance, said property manager manages maintenance issues, problems that arise during bookings, basically anything that needs a physical person at the property, while I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)?

According to what I have read straight from the IRS website and other places, we need to either meet 500 hours, or at least 100 hours and also work more than anyone else on the property. I feel I could definitely meet both of those on my own, as my husband works full-time , and I will be the only person besides the hourly employees stated above that would be accruing hours. However, the one CPA I briefly talked to said the investment would be treated as passive. No real explanation as to why or whether there were exceptions to that.

We are newbies, and don't want to miss out on a great investment and tax savings opportunity, but obviously want to do everything correctly in the eyes of Uncle Sam. Thank you so much in advance for your help.

I think "unlikely" is a nice way of saying it. You are not going to qualify for active and will not get any extra depreciation. Unless you are flying from MN to FL every time the place needs to be cleaned then a cleaner is going to spend more time in that property than you. "Managing" on a listing platform is not going to pass the IRS sniff test and good tax preparer will not let you claim active to get extra write offs. Them helping one person try to save a few dollars will jeopardize their entire practice and every other person who does the taxes at that office.
Listen to the Tax Smart REI podcast, they have a ton of episodes on the STR strategy and how to qualify for the hours. Your best bet is probably to get your real estate license and start actively being a real estate professional or buy a STR in your market that you can physically be at on a regular basis.
2 Reply
Jake BakerBusiness Member
Flipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 694 votes
1y
@Annie Anson
Working with a Property Manager: If you hire a property manager for on-the-ground tasks like maintenance, you can still meet material participation—if you handle the majority of the work that drives the property’s success (e.g., guest services, pricing strategy, advertising). The key is ensuring you work more hours than anyone else on the property, including your property manager.
Keep a detailed log of your hours spent on the property—managing listings, coordinating cleanings, marketing, and even initial decorating/setup all count.
Some CPAs are conservative and hesitant to qualify STRs as active, particularly when property managers are involved.
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Annie Anson
OP
Member since 2024 · 8 posts · 9 votes
1y
Quote from @Sean O'Keefe:

Quote from @Annie Anson:

Quote from @Sean O'Keefe:

Quote from @Annie Anson:

My husband and I are ready to invest in our first vacation property, likely in Florida. We hope to eventually have multiple properties, but want to take our time to learn and make the right decisions with our first rental. I should add it will be a short term rental property.

What adds complexity to our plan, is that we live in Minnesota. We would like for the investment to be treated as active, of course. However, we will likely need a property manager to assist with some facets of running this rental (since we would not live locally) and would primarily market it through platforms such as Airbnb and VRBO to start, (eventually setting up a direct booking process).

Here's our question for those who have experience in STR's or who might be involved in a similar scenario: How challenging is it to meet the material participation hours needed to achieve active status? My husband is a high income W2 earner, and meeting active criteria would put some of our tax dollars back in our pocket. Is it possible to have a property manager who manages some of the property, while I manage the rest remotely? For instance, said property manager manages maintenance issues, problems that arise during bookings, basically anything that needs a physical person at the property, while I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)?

According to what I have read straight from the IRS website and other places, we need to either meet 500 hours, or at least 100 hours and also work more than anyone else on the property. I feel I could definitely meet both of those on my own, as my husband works full-time , and I will be the only person besides the hourly employees stated above that would be accruing hours. However, the one CPA I briefly talked to said the investment would be treated as passive. No real explanation as to why or whether there were exceptions to that.

We are newbies, and don't want to miss out on a great investment and tax savings opportunity, but obviously want to do everything correctly in the eyes of Uncle Sam. Thank you so much in advance for your help.

If you have a property manager and live 100s of miles away, it’s unlikely that you meet the material participation requirements to qualify for tax benefits you mentioned.
.
.
.
*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.

Hi Sean,
With all due respect, unlikely meeting the requirements is not very useful information. This leaves a lot of room for interpretation and that is exactly the issue we are having at the moment. So far it sounds like we will just need to verify via a CPA, which is fine, if that is what we need to do. I was hoping some folks might be in a similar situation or had a similar experience and might be able to share. I do appreciate you taking the time to respond regardless.
The IRS specifically calls out owner distance from rental and having a property manager as a red flag that owner isn't materially participating. Based on what you said you meet this criteria.

Everyone's situation is different. You may still qualify. Since leveraging this tax strategy could save you significantly on taxes if you do qualify you might want to seek personalized advice, that's tough to get in a public forum, to avoid missing out or getting audited and failing audit.
.
.
.
*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
Thank you Sean. This is actually quite helpful insight in understanding the reasoning. Much appreciated.
1 Reply
Annie Anson
OP
Member since 2024 · 8 posts · 9 votes
1y
Quote from @Jake Baker:

@Annie Anson
Working with a Property Manager: If you hire a property manager for on-the-ground tasks like maintenance, you can still meet material participation—if you handle the majority of the work that drives the property’s success (e.g., guest services, pricing strategy, advertising). The key is ensuring you work more hours than anyone else on the property, including your property manager.
Keep a detailed log of your hours spent on the property—managing listings, coordinating cleanings, marketing, and even initial decorating/setup all count.
Some CPAs are conservative and hesitant to qualify STRs as active, particularly when property managers are involved.

Thank you. This makes the most sense to me given all the details I’ve researched. I appreciate your insight and opinion.
1 Reply
Jorge VazquezBusiness Member
Real Estate Broker · Tampa, FL · Member since 2017 · 1k+ posts · 679 votes
1y
Hey Annie, congrats on taking the leap into short-term rentals! Meeting the material participation hours is absolutely doable, even with a property manager, as long as you stay actively involved in key tasks like marketing, bookings, and bookkeeping. When I was tracking my hours, I used WhatsApp to communicate with my property manager, contractors, and guests—it timestamped every conversation and became my built-in log for documentation. Your plan to handle the strategic aspects remotely while a property manager handles onsite issues is smart, and as long as you log your work and stay hands-on, you’ll likely qualify for active status. Florida’s a great market, so if you need tips or guidance, let me know—I’m happy to send you an example of the report I created and the article I wrote about this.
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Andrew SteffensBusiness Member
Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
1y
Hi Annie! In addition to managing 65+ units in the greater Tampa area I also am a broker who almost exclusively represents investors buy the best available STR properties both on and off market. I have several people who are doing what you are attempting to do. I cannot speak to the IRS compliance as I am not a CPA but I am happy to share some of what they do, as well as assist in any management and/or acquisition questions. Best of luck! :)
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
1y
@Annie Anson To achieve active status for tax purposes on your short-term rental (STR) in Florida, you must meet IRS material participation rules, such as the 500-hour rule or the 100-hour rule where your involvement exceeds anyone else's. You can still use a property manager for on-site tasks while managing bookings, marketing, and bookkeeping remotely, but your hours must be documented and exceed the property manager's. Carefully track all activities, as remote management can face IRS scrutiny. But there are other tests and if planned correctly, you don't need these two tests or even track hours the first year if your participation is substantially all hours.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
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Aaron ZimmermanBusiness Member
Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
1y
Quote from @Annie Anson:

My husband and I are ready to invest in our first vacation property, likely in Florida. We hope to eventually have multiple properties, but want to take our time to learn and make the right decisions with our first rental. I should add it will be a short term rental property.

What adds complexity to our plan, is that we live in Minnesota. We would like for the investment to be treated as active, of course. However, we will likely need a property manager to assist with some facets of running this rental (since we would not live locally) and would primarily market it through platforms such as Airbnb and VRBO to start, (eventually setting up a direct booking process).

Here's our question for those who have experience in STR's or who might be involved in a similar scenario: How challenging is it to meet the material participation hours needed to achieve active status? My husband is a high income W2 earner, and meeting active criteria would put some of our tax dollars back in our pocket. Is it possible to have a property manager who manages some of the property, while I manage the rest remotely? For instance, said property manager manages maintenance issues, problems that arise during bookings, basically anything that needs a physical person at the property, while I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)?

According to what I have read straight from the IRS website and other places, we need to either meet 500 hours, or at least 100 hours and also work more than anyone else on the property. I feel I could definitely meet both of those on my own, as my husband works full-time , and I will be the only person besides the hourly employees stated above that would be accruing hours. However, the one CPA I briefly talked to said the investment would be treated as passive. No real explanation as to why or whether there were exceptions to that.

We are newbies, and don't want to miss out on a great investment and tax savings opportunity, but obviously want to do everything correctly in the eyes of Uncle Sam. Thank you so much in advance for your help.

Agreed with @Sean O'Keefe. It is going to be an uphill battle trying to prove material participation with a property manager. You'll need to prove that you worked more hours than them which is hard to do. You could find handypeople and cleaners and self manage the rest. There's a lot you can do remotely such as listing on websites, pricing strategies, arranging/order supplies, guest communications, going to the property and doing work on it (note: travel time generally doesn't count). If you're not meeting the 500 test, you will need to track the time of each person that performs work on the property.
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Josh GreenBusiness Member
Realtor · Tampa/St Pete/Clearwater/Bradenton · Member since 2020 · 395 posts · 353 votes
1y
Quote from @Annie Anson:

My husband and I are ready to invest in our first vacation property, likely in Florida. We hope to eventually have multiple properties, but want to take our time to learn and make the right decisions with our first rental. I should add it will be a short term rental property.

What adds complexity to our plan, is that we live in Minnesota. We would like for the investment to be treated as active, of course. However, we will likely need a property manager to assist with some facets of running this rental (since we would not live locally) and would primarily market it through platforms such as Airbnb and VRBO to start, (eventually setting up a direct booking process).

Here's our question for those who have experience in STR's or who might be involved in a similar scenario: How challenging is it to meet the material participation hours needed to achieve active status? My husband is a high income W2 earner, and meeting active criteria would put some of our tax dollars back in our pocket. Is it possible to have a property manager who manages some of the property, while I manage the rest remotely? For instance, said property manager manages maintenance issues, problems that arise during bookings, basically anything that needs a physical person at the property, while I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)?

According to what I have read straight from the IRS website and other places, we need to either meet 500 hours, or at least 100 hours and also work more than anyone else on the property. I feel I could definitely meet both of those on my own, as my husband works full-time , and I will be the only person besides the hourly employees stated above that would be accruing hours. However, the one CPA I briefly talked to said the investment would be treated as passive. No real explanation as to why or whether there were exceptions to that.

We are newbies, and don't want to miss out on a great investment and tax savings opportunity, but obviously want to do everything correctly in the eyes of Uncle Sam. Thank you so much in advance for your help.

Hey Annie,
Most my clients I help with STRs and the STR loophole are out-of-state. To answer the question, not hard. In fact, feel free to text me and I can literally text you a copy/paste text I wrote to another client that had a similar question.
That text I just jotted out maybe 30+ you can do that will help you meet those requirements and most of those can be done 100% remotely. I've done this a lot and personally as well, so I really know the details that go into making a successful STR and how much work is really involved.
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Daniel P KauffmanBusiness Member
Accountant · San Antonio · Member since 2017 · 1 post · 1 vote
1y
Hi Annie! Congratulations on feeling ready to invest in your first vacation property. It sounds like you are circling the relevant issues with focusing on the material participation hours and clearing the threshold for either 500 hours or at least 100 hours and more than anyone else. These are the critical tests you will need to achieve and support with a detailed time log. The red flags of managing from a distance and hiring a property manager are legitimate concerns that make it more challenging. However, it is possible. One approach that I have not seen included in the discussion is as you are still in the planning phase, you could change your approach and the facts to make it more favorable for your strategy. Specifically, you could forego hiring a property manager in the first year, as this is when you would want to apply a cost segregation and accelerate depreciation. It sounds like what you really need is a handyman that you could send out when you need for on the ground maintenance. If you found a few handymen you could rely on, and make a trip out there for a few days to get things set up with shopping, decorating, and furnishing the STR that would remove the red flag of the property manager, and significantly boost your material participation hours to clear one of the thresholds. If you're intentional with it, you may be able to include some travel deductions as well. I hope this helps!
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1 Reply
Melissa HaworthBusiness Member
Real Estate Agent · The Panhandle | The Emerald Coast | Panama City Beach | Destin · Member since 2017 · 254 posts · 99 votes
1y
Hi there! First of all, congrats on taking the leap into vacation property investing—it's such an exciting journey, and I promise, with the right guidance, it can be incredibly rewarding! I've worked with several first-time investors, including out-of-state buyers like yourself, and it's 100% possible to build a successful short-term rental (STR) business even when you're managing remotely. Let me dive into a few things that might help.

On Meeting Active Status

You’re spot on about the 500-hour rule or the 100-hour rule with material participation. From what you’ve described, it sounds like you have a solid plan to ensure your hours meet the active participation criteria. Tasks like decorating, setting rates, marketing, and bookkeeping all count towards your hours, so as long as you’re documenting everything thoroughly, you should be in good shape.

That said, having a property manager for maintenance and on-the-ground needs can still work within the active participation framework. The key is ensuring you are contributing more hours than anyone else involved. For instance, if you’re handling the strategy, guest communications, and daily management while the property manager focuses solely on physical tasks, you’d likely qualify—especially since your husband wouldn’t be contributing hours. A great CPA who specializes in STRs can confirm this and help you stay compliant.

About That CPA…

Honestly, I'd recommend finding a new one. There are plenty of STR-savvy CPAs who can help you navigate the rules, maximize tax benefits, and make sure everything is done right. A CPA experienced in STRs should be able to break down exactly how to meet material participation requirements in your unique situation. (I can connect you with some resources if you'd like!)

Starting with the Right Property

Given that this is your first STR and you're planning to manage remotely, I'd suggest focusing on a market with a strong local infrastructure for short-term rentals—like Panama City Beach or Destin. I've helped several clients in similar situations find their first vacation properties here in Florida, and the Panhandle is fantastic for beginners because of its year-round tourism and robust support networks (property managers, cleaning services, etc.). You could even consider a condo with an established HOA that's STR-friendly—it can simplify maintenance and management.

A Few Other Things to Note:
1. Documentation is everything. Keep detailed records of your hours and tasks—it’s crucial for proving active status if ever questioned.
2. Don’t overthink starting with Airbnb/VRBO. Many of my clients begin there, then transition to direct bookings once they’re comfortable. It’s a great way to learn the ropes.
3. Build the right team. A reliable property manager and CPA are worth their weight in gold, especially when you’re managing remotely.
If you’d like to chat more about what’s worked for my clients or have questions about specific markets, I’m always happy to share insights. I specialize in helping out-of-state investors find their ideal properties on the Emerald Coast/in the panhandle so I am more than happy to answer any questions I can to help. You’ve got this, and I can’t wait to hear about your first rental property success story! 😊
[email protected]469-658-2869
1 Reply
Jorge VazquezBusiness Member
Real Estate Broker · Tampa, FL · Member since 2017 · 1k+ posts · 679 votes
1y
Quote from @Jorge Vazquez:

Hey Annie, congrats on taking the leap into short-term rentals! Meeting the material participation hours is absolutely doable, even with a property manager, as long as you stay actively involved in key tasks like marketing, bookings, and bookkeeping. When I was tracking my hours, I used WhatsApp to communicate with my property manager, contractors, and guests—it timestamped every conversation and became my built-in log for documentation. Your plan to handle the strategic aspects remotely while a property manager handles onsite issues is smart, and as long as you log your work and stay hands-on, you’ll likely qualify for active status. Florida’s a great market, so if you need tips or guidance, let me know—I’m happy to send you an example of the report I created and the article I wrote about this.

I just got an update from my client that the CPA approved what we did. Awesome stuff.
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1 Reply
Annie Anson
OP
Member since 2024 · 8 posts · 9 votes
1y
Quote from @Daniel P Kauffman:

Hi Annie! Congratulations on feeling ready to invest in your first vacation property. It sounds like you are circling the relevant issues with focusing on the material participation hours and clearing the threshold for either 500 hours or at least 100 hours and more than anyone else. These are the critical tests you will need to achieve and support with a detailed time log. The red flags of managing from a distance and hiring a property manager are legitimate concerns that make it more challenging. However, it is possible. One approach that I have not seen included in the discussion is as you are still in the planning phase, you could change your approach and the facts to make it more favorable for your strategy. Specifically, you could forego hiring a property manager in the first year, as this is when you would want to apply a cost segregation and accelerate depreciation. It sounds like what you really need is a handyman that you could send out when you need for on the ground maintenance. If you found a few handymen you could rely on, and make a trip out there for a few days to get things set up with shopping, decorating, and furnishing the STR that would remove the red flag of the property manager, and significantly boost your material participation hours to clear one of the thresholds. If you're intentional with it, you may be able to include some travel deductions as well. I hope this helps!
Very helpful, and I will put some thought into this. Thanks Daniel.
0 Reply
Account Closed
Member since 2025 · 14 posts · 3 votes
1y
Hey Annie!

Investing in a short-term rental property as non-local owners can certainly bring tax advantages, but achieving material participation requires careful planning and documentation. To qualify for active treatment and unlock potential tax savings, you must meet the material participation rules outlined by the IRS. For short-term rentals, this often means meeting one of the following: working at least 500 hours on the property during the year or working at least 100 hours while also doing more than anyone else, including your property manager. Based on your description, if you take on responsibilities such as decorating, marketing, bookings, and bookkeeping, you could potentially meet the hours required, even with a property manager handling on-site tasks like maintenance. However, it’s crucial to track and document all hours worked meticulously to demonstrate material participation if audited.

The CPA’s suggestion that your activity would be treated as passive could stem from the involvement of a property manager, as their role could make it appear that you are not the primary manager of the rental. However, as long as your hours exceed theirs and you actively contribute to managing the business, the property may still qualify as an active investment under the material participation rules. Be sure to clarify the scope of the property manager’s duties and keep detailed records of your own hours. Given your husband’s high W-2 income, the tax savings from qualifying as active could be significant, allowing you to offset his income with potential rental losses.

0 Reply
Jason MalabuteBusiness Member
Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 897 votes
1y
To qualify for active status on short-term rentals for tax purposes , you need to meet the IRS’s material participation requirements. This could mean either spending at least 500 hours actively involved in the property or ensuring your involvement exceeds that of anyone else, such as a property manager. You can still use a property manager for on-site tasks, but your own activities—like managing bookings, marketing, and bookkeeping—must be well-documented and exceed the property manager’s time.

It’s important to carefully track your hours, especially if you’re managing remotely, as this can face additional scrutiny from the IRS. That said, there are alternative ways to meet the requirements, and with proper planning, you might not need to rely on these specific tests if most or all of the participation comes from you during the first year.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
1y
Quote from @Annie Anson:

My husband and I are ready to invest in our first vacation property, likely in Florida... a short term rental property.

What adds complexity to our plan, is that we live in Minnesota...

...How challenging is it to meet the material participation hours needed to achieve active status?.. Is it possible to have a property manager who manages some of the property, while I manage the rest remotely? For instance, said property manager manages maintenance issues, problems that arise during bookings, basically anything that needs a physical person at the property, while I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)?

First, do not get upset with the words "likely" or "possibly" - these words are accurate. Yes, I was tempted to type "these words are likely accurate" ;) The reason is because tax rules are very much case-by-case, and your mileage may vary.

Here is an important clue in your particular situation:
...I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)...

Let's count how much time you are going to spend doing what you described. Let's say you spent a month on the initial preparation: cleaning, painting, shopping for furnishings, assembling IKEA furniture and so on. We're possibly (sorry for using the p-word) talking about 200 hours. For the next 10 months (40 weeks) you spend a fairly reasonable 5 hours a week marketing, communicating with guests and your property manager and bookkeeping. Here is another 200 hours. We now have 400 hours in the bag, and hitting 500 is attainable during your first year.

But what if you only spent 2 days visiting this property and from that point on outsourced all work? Yes, you still do online shopping and coordination and so on, but hitting 500 hours in this case becomes far more challenging. Do you see why we accountants say "likely" and "possibly" in every paragraph we write?

If you cannot make 500 hours, then you need to make 100 hours and "outwork" everybody else. Let's say you have a guest every week for 10 months. This is 40 guests. And you use a cleaning lady who spends 5 hours to reset the property for the next guest. Now your cleaner has 200 hours, and you will have to spend at least 201. Is it doable? Well, at least it's much easier to gather 201 hours than 500 hours. But now you have a challenge of documenting both your time AND time of everybody else involved with the property.

Now, to answer your question - is it possible from out of state? Yes, it is, particularly if you undertake the initial preparation and furnishing of the property yourself. But the only way to have a definitive answer and avoid "likely" and "possibly" is to analyze your plan with your own CPA and find ways to boost your hours. Here is how to find such a CPA:
https://www.biggerpockets.com/forums/51/topics/1222774-expla...

You probably (argh, can't help myself) noticed that I was pointedly talking about the initial year. What about the second and third year when you no longer have the labor-intensive initial setup? Actually, you may not need to qualify in the second year. Why? Because your second year is likely (oops, I did it again) to show a net profit instead of net loss. It is your first year when you get the major tax savings windfall due to cost segregation and bonus depreciation. More about the concept of STR tax savings is here:
https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

As to one CPA saying that your losses would still be passive, we cannot comment. Maybe you misunderstood what that CPA said. Maybe they meant a different context. Maybe they were not very good. But now you know.

4 Reply
Julio GonzalezPro Member
Specialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
1y
@Annie Anson

Understanding the STR rules can be overwhelming. Here's an article that you may find helpful. Feel free to reach out if you have any questions.

The Short- Term Rental Loophole ExplainedThe Short- Term Rental Loophole Explained

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0 Reply
Annie Anson
OP
Member since 2024 · 8 posts · 9 votes
1y
Quote from @Michael Plaks:

Quote from @Annie Anson:

My husband and I are ready to invest in our first vacation property, likely in Florida... a short term rental property.

What adds complexity to our plan, is that we live in Minnesota...

...How challenging is it to meet the material participation hours needed to achieve active status?.. Is it possible to have a property manager who manages some of the property, while I manage the rest remotely? For instance, said property manager manages maintenance issues, problems that arise during bookings, basically anything that needs a physical person at the property, while I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)?

First, do not get upset with the words "likely" or "possibly" - these words are accurate. Yes, I was tempted to type "these words are likely accurate" ;) The reason is because tax rules are very much case-by-case, and your mileage may vary.

Here is an important clue in your particular situation:
...I manage the rest? (i.e. initial decorating and painting, bookings, rate structures, marketing, bookkeeping housekeeping, etc)...

Let's count how much time you are going to spend doing what you described. Let's say you spent a month on the initial preparation: cleaning, painting, shopping for furnishings, assembling IKEA furniture and so on. We're possibly (sorry for using the p-word) talking about 200 hours. For the next 10 months (40 weeks) you spend a fairly reasonable 5 hours a week marketing, communicating with guests and your property manager and bookkeeping. Here is another 200 hours. We now have 400 hours in the bag, and hitting 500 is attainable during your first year.

But what if you only spent 2 days visiting this property and from that point on outsourced all work? Yes, you still do online shopping and coordination and so on, but hitting 500 hours in this case becomes far more challenging. Do you see why we accountants say "likely" and "possibly" in every paragraph we write?

If you cannot make 500 hours, then you need to make 100 hours and "outwork" everybody else. Let's say you have a guest every week for 10 months. This is 40 guests. And you use a cleaning lady who spends 5 hours to reset the property for the next guest. Now your cleaner has 200 hours, and you will have to spend at least 201. Is it doable? Well, at least it's much easier to gather 201 hours than 500 hours. But now you have a challenge of documenting both your time AND time of everybody else involved with the property.

Now, to answer your question - is it possible from out of state? Yes, it is, particularly if you undertake the initial preparation and furnishing of the property yourself. But the only way to have a definitive answer and avoid "likely" and "possibly" is to analyze your plan with your own CPA and find ways to boost your hours. Here is how to find such a CPA:
https://www.biggerpockets.com/forums/51/topics/1222774-expla...

You probably (argh, can't help myself) noticed that I was pointedly talking about the initial year. What about the second and third year when you no longer have the labor-intensive initial setup? Actually, you may not need to qualify in the second year. Why? Because your second year is likely (oops, I did it again) to show a net profit instead of net loss. It is your first year when you get the major tax savings windfall due to cost segregation and bonus depreciation. More about the concept of STR tax savings is here:
https://www.biggerpockets.com/forums/51/topics/1122635-the-s...

As to one CPA saying that your losses would still be passive, we cannot comment. Maybe you misunderstood what that CPA said. Maybe they meant a different context. Maybe they were not very good. But now you know.

Michael, many thanks for your time, humor, and thought into responding to my post. I will be putting time into thinking about all you have said.
0 Reply
Annie Anson
OP
Member since 2024 · 8 posts · 9 votes
1y
Quote from @Melissa Haworth:
Hi there! First of all, congrats on taking the leap into vacation property investing—it's such an exciting journey, and I promise, with the right guidance, it can be incredibly rewarding! I've worked with several first-time investors, including out-of-state buyers like yourself, and it's 100% possible to build a successful short-term rental (STR) business even when you're managing remotely. Let me dive into a few things that might help.

On Meeting Active Status

You’re spot on about the 500-hour rule or the 100-hour rule with material participation. From what you’ve described, it sounds like you have a solid plan to ensure your hours meet the active participation criteria. Tasks like decorating, setting rates, marketing, and bookkeeping all count towards your hours, so as long as you’re documenting everything thoroughly, you should be in good shape.

That said, having a property manager for maintenance and on-the-ground needs can still work within the active participation framework. The key is ensuring you are contributing more hours than anyone else involved. For instance, if you’re handling the strategy, guest communications, and daily management while the property manager focuses solely on physical tasks, you’d likely qualify—especially since your husband wouldn’t be contributing hours. A great CPA who specializes in STRs can confirm this and help you stay compliant.

About That CPA…

Honestly, I'd recommend finding a new one. There are plenty of STR-savvy CPAs who can help you navigate the rules, maximize tax benefits, and make sure everything is done right. A CPA experienced in STRs should be able to break down exactly how to meet material participation requirements in your unique situation. (I can connect you with some resources if you'd like!)

Starting with the Right Property

Given that this is your first STR and you're planning to manage remotely, I'd suggest focusing on a market with a strong local infrastructure for short-term rentals—like Panama City Beach or Destin. I've helped several clients in similar situations find their first vacation properties here in Florida, and the Panhandle is fantastic for beginners because of its year-round tourism and robust support networks (property managers, cleaning services, etc.). You could even consider a condo with an established HOA that's STR-friendly—it can simplify maintenance and management.

A Few Other Things to Note:

Documentation is everything. Keep detailed records of your hours and tasks—it’s crucial for proving active status if ever questioned.
Don’t overthink starting with Airbnb/VRBO. Many of my clients begin there, then transition to direct bookings once they’re comfortable. It’s a great way to learn the ropes.
Build the right team. A reliable property manager and CPA are worth their weight in gold, especially when you’re managing remotely.

If you’d like to chat more about what’s worked for my clients or have questions about specific markets, I’m always happy to share insights. I specialize in helping out-of-state investors find their ideal properties on the Emerald Coast/in the panhandle so I am more than happy to answer any questions I can to help. You’ve got this, and I can’t wait to hear about your first rental property success story! 😊
Melissa, many thanks for your valuable insight.
1 Reply
Havital Miltz
Accountant · Accepting new clients from anywhere in the USA · Member since 2025 · 37 posts · 19 votes
1y
Hi there,
If you live in another state it would be very difficult to show that you materially participate, as you need at least 500 hours, considering the IRS sees where your home state is and where the rentals are, it may raise red flags for the IRS if you try to claim that... as a tax accountant and investor myself, even without actually speaking in person, I do not know I feel comfortable suggesting you show material participation
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How to meet material participation hours for out of state investors

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On Meeting Active Status

About That CPA…

Starting with the Right Property

A Few Other Things to Note:

On Meeting Active Status

About That CPA…

Starting with the Right Property

A Few Other Things to Note: