All Forum Posts by: Daniel Cannon

Thanks all for the replies. It's been difficult to find any specific answers regarding material participation online. I am meeting with a CPA to discuss these questions, but figured I'd see if anyone has been in a similar situation. 

These are my current understandings of the answers to my above questions:

1. Unsure

2. All participants in the activity would count their hours individually. So each couple would accumulate 4 hours for the above example

3. No effect 

4. Should count for the more local couple, but for the longer travelling couple may be more difficulty to prove that are going to the property to explicitly work on the property.

5. Unsure

I'll update answers after meeting with CPA next week. 

Our Situation:

Two couples, new to real estate investing, each with one working spouse with a high income (W2 and 1099) and one non-working spouse plan to go 50/50 on a new construction STR which will not close until Spring of '25.

Our Plan:

Year 1: Both couples satisfy test #1 and each participate in 500 hours of activity. Cross fingers that congress passes bill to allow bonus depreciation, perform a cost segregation analysis in year 1 to capture as much depreciation as possible to offset incomes. 

Subsequent years: Alternate satisfying test #3 with one couple participating in at least 100 hours of activity (and more than any other individual) and the other couple not meeting participation test. 

Questions:

1. When can we start to accumulate hours? If the property does not close until spring of '25 do the hours spent furniture shopping in January still count?

2. How do spouses hours count? For example, if both couples are in the property working on building a piece of furniture that takes 2 hours how many hours towards material participation does that count? I would assume/hope since each person is there they each get to claim 2 hours and since spouses hours are combined that would mean 4 hours to each couple towards the 500 requirement. 

3. Does claiming a large amount of depreciation in year 1 and then not passing material participation test in the following year have any effect on the previous years ability to offset income? 

4. Do travel hours to and from the property if going there explicitly to work on the property count? One couple would be driving about 90 mins each way and the other couple would be driving 9 hours each way. 

5. What flaws do you see in our above plan? 

We of course are planning to meet with a real estate CPA to clarify these questions, but I'm trying to be as prepared as possible and understand as much as I can before meeting with them.  Thanks in advance for your responses, this community has already been an amazing resource.