Material participation while managing renovations at a remote property

[Chi Zhang]

Hi BP, 

I’m in the process of renovating and setting up my first short term rental. The property is about 3 hours drive from my primary residence and I go there once or twice every week to work with my contractors to coordinate and manage the renovation. For context I don’t just watch them, I’m actually directing them where to do what and helping them to bring supplies over as the location is remote from large department stores like Home Depot. 

Recently I took some days off from my work to stay at the property for an entire week in an attempt to finish up the renovation here and wrap up most of the leftover work. My question is does travel time and sleep time count toward material participation

I’m aiming to qualify for the 500 hours of material participation. I’ve already met that requirement at this point if I include my 6 hour round trip driving to the property from my primary residence every week. Not sure if I can log the entire week of time that I recently spent here managing the renovations or I should only log the time I’m actually up and working, removing the sleep time at night? And does the driving time count as well? There are mixed opinions about this topic online.

Any insight on this would be much appreciated!

[Bruce Woodruff]

No, you generally would not get to count your time as a $$ investment. I was a high-end builder and I could not count my time working on properties, even when adding a room or more. They expect you to 'donate' your time if you are the owner, sorry.

[Chi Zhang]

Quote from @Bruce Woodruff:

No, you generally would not get to count your time as a $$ investment. I was a high-end builder and I could not count my time working on properties, even when adding a room or more. They expect you to 'donate' your time if you are the owner, sorry.

Thank you Bruce. There maybe some misunderstanding, being a short term rental property owner that will be self managing the daily operations, I’ve learned that in this scenario I would need to count at least some of the time spent setting up the property to pass one of the material participation tests.

[Bruce Woodruff]

Quote from @Chi Zhang:

Quote from @Bruce Woodruff:

No, you generally would not get to count your time as a $$ investment. I was a high-end builder and I could not count my time working on properties, even when adding a room or more. They expect you to 'donate' your time if you are the owner, sorry.

Thank you Bruce. There maybe some misunderstanding, being a short term rental property owner that will be self managing the daily operations, I’ve learned that in this scenario I would need to count at least some of the time spent setting up the property to pass one of the material participation tests.

 That may be so. But don't mess with the IRS with this.

[Nathan Gesner]

Quote from @Chi Zhang:

I've spoken to my CPA about this and he said it is extremely hard to meet the qualifications, and most investors have enough deductions that this deduction isn't worth trying to achieve. I would have a serious talk with your CPA to see if it's achievable and worth pursuing.

https://taxmodern.com/articles/material-participation#:~:text=Material%20Participation%20Qualifications,-To%20meet%20the&text=yourself%20and%20no%20one%20else,more%20time%20than%20anyone%20else.

[Joe Whitley]

I deal with this issue all the time. It is extremely difficult to make a $$ provision for your time and expenses incurred when working on your property. I take a very conservative approach. My travel is measured by cost per mile used to travel to and from the property. Meals and related expenses should include receipts. Other expenses incurred that are required to fix up the property should also include receipts. Rule of thumb. All related expenses should be quantified and supported.Unfortunately, this should not include your invested time while working on the property that can be challenged by the IRS. Your CPA will know more about this issue. 

[Chi Zhang]

Quote from @Nathan Gesner:

Quote from @Chi Zhang:

I've spoken to my CPA about this and he said it is extremely hard to meet the qualifications, and most investors have enough deductions that this deduction isn't worth trying to achieve. I would have a serious talk with your CPA to see if it's achievable and worth pursuing.

https://taxmodern.com/articles/material-participation#:~:text=Material%20Participation%20Qualifications,-To%20meet%20the&text=yourself%20and%20no%20one%20else,more%20time%20than%20anyone%20else.

Thank you Nathan. This is very helpful!

[Chi Zhang]

Quote from @Joe Whitley:

I deal with this issue all the time. It is extremely difficult to make a $$ provision for your time and expenses incurred when working on your property. I take a very conservative approach. My travel is measured by cost per mile used to travel to and from the property. Meals and related expenses should include receipts. Other expenses incurred that are required to fix up the property should also include receipts. Rule of thumb. All related expenses should be quantified and supported.Unfortunately, this should not include your invested time while working on the property that can be challenged by the IRS. Your CPA will know more about this issue. 

Thank you Joe. I do keep detailed records of everything as well as uploading receipts for each transaction. I use an app called Stessa for that. I also use the cost per mile method for mileage expense.

[Michael Baum]

Everyone had it right @Chi Zhang. You really need to be careful in what you do to try and meet the material participation goal.

With the new funding the IRS has received, they are assigning more agents to people like us. You need to have all your ducks in a row.

Do you have a CPA? If not, then you need to get one.

[Chi Zhang]

Quote from @Michael Baum:

Everyone had it right @Chi Zhang. You really need to be careful in what you do to try and meet the material participation goal.

With the new funding the IRS has received, they are assigning more agents to people like us. You need to have all your ducks in a row.

Do you have a CPA? If not, then you need to get one.

Thanks Michael. My current CPA is not well versed in the realm of short term rentals, finding one that is has been on my pipeline but with all the work involved with the property setup I haven’t gotten around to it. Sounds like I should prioritize that given the current situation with IRS.

[Jon Martin]

@Chi Zhang I take it that you are trying to use the depreciation and expenses as a loss to offset W2 income? 

If yes I think you are doing everything right so far. The requirements are not difficult to hit "On Paper". You should be well over 100 hours for the year and more than your cleaners if you are responding to all of the inquiries, changing doors codes, ordering supplies etc. Try to have a few cleaners and fire the slower ones. Turno is a good app for cleaners because it logs their start/stop time for you, therefore you have 3rd party record keeping for that. 

Where it gets murky is how much the IRS will scrutinize your time longs and those of your vendors. Keep logging yours and their time meticulously and hope for the best. Nathan Meeker is an accountant here on BP who specializes in this. He can tell you what time does or does not count, so best to over record now and edit it down later. 

Disclaimer: This is not tax preparation or legal advice. 

[Chi Zhang]

Quote from @Jon Martin:

@Chi Zhang I take it that you are trying to use the depreciation and expenses as a loss to offset W2 income? 

If yes I think you are doing everything right so far. The requirements are not difficult to hit "On Paper". You should be well over 100 hours for the year and more than your cleaners if you are responding to all of the inquiries, changing doors codes, ordering supplies etc. Try to have a few cleaners and fire the slower ones. Turno is a good app for cleaners because it logs their start/stop time for you, therefore you have 3rd party record keeping for that. 

Where it gets murky is how much the IRS will scrutinize your time longs and those of your vendors. Keep logging yours and their time meticulously and hope for the best. Nathan Meeker is an accountant here on BP who specializes in this. He can tell you what time does or does not count, so best to over record now and edit it down later. 

Disclaimer: This is not tax preparation or legal advice. 

You’re right, I’m trying to use the expenses to offset my W2 income, there are indeed some grey areas on what time counts and what don’t so I’m trying to figure that out as I log my time. Thanks for the recommendation! 

I’m not trying to meet the 100 hour requirement as that requires me to time log every vendor that has worked on the house. I’m trying to meet the 500 hour test which I should be able to hit by the end of year even excluding the travel  time. But it’s uncertain how meticulously the IRS will examine my logs. Will definitely check with an experienced CPA on this.