You would not be able to be classified as "materially participating" under what you propose, you must meet a couple of criteria to be considered including 100hrs+ spent on the business and more time than anyone else.

Hey Travis, I close a number of these for clients, usually more common on properties that were wrecked by previous tenants and they want to use existing equity to help repair the damages.We would classify it as a 'Refi-rehab' that would include a direct 'cash out' portion as well as a rehab escrow to reimburse you after you finish the repairs.

Tutorials  emphasize the need to do due diligence on all the following:--check for taxes and liens against the property--find out which taxes and liens, if any, will remain attached to the property--make sure it is a buildable lot--to do above, you need to establish how the lot is classified for code purposes, and access the lot specifications, minimums the lot must meet for construction to be allowed--you further need to find out what its sewage situation is because 1) municipalities have different lot minimum specification for lots with public sewage and lots with septic; and 2) if the lot will require the construction of a septic tank, you need to take that into account in your decision.

But, a nicely designed and painted house with well thought-out accent walls, etc may subconsciously contribute to my higher classifying in quality and condition, which may somewhat influence value, but not necessarily significantly.Good luck!

You can also try posting on the classified section of BiggerPockets 

Although it does state towards the top that rental activities, even if there's material participation, are still classified as passive.

I have some rentals and have more depreciation than what they rent for so if I was able to classify the new construction as passive income, I could then use the "losses" from my other passive investments to help offset the income.

For newly constructed, purchased or renovated properties and also retroactive generally over the last 10 years, building components are properly classified into individual units of property and accurate recovery periods for computing depreciation deductions.

Defining the class of the neighborhoods is the tough one to start that grade C out for...I have some clients unused to the mid-west who are used to high-end suburbs who consider our better areas a B- area.Personally, I classify the C- anything I verify I have easy access to my spare magazine before I enter a vacant property.

I seen deals marketed as Class B properties that I would certainly classify as C-ish, and yet have also described things as B, that others say "that's an A or A-".