How to meet material participation hours for out of state investors

[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.

[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.

[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. 
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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.

[Annie Anson]

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. 

[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.

[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

[Zane Cress]

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.

[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.

[Annie Anson]

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. 

[Annie Anson]

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. 

[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. 

[Andrew Steffens]

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! :)

[Ashish Acharya]

@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.

[Aaron Zimmerman]

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. 

[Josh Green]

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.