You Make the Call - Aug. 15, 2024

Question: Freddy recently made a career switch after retiring from his long-time position as a prison guard. He now enjoys running his waterfront residential rental property as his sole profession. He has substantial first-year losses from his rental property and knows that if he materially participates in the rental activity as a real estate professional, he can utilize the losses against nonpassive income on his tax return. Though he worked on the rental more than 750 hours in the year, Freddy spent the bulk of his time renovating the property, including gutting and remodeling the home's bathrooms and kitchen. Does the renovation work count toward the 750 hours needed to qualify for material participation assuming he meets the other qualifications for a real estate professional?

Answer: Yes. The renovation work is considered material participation and counts toward the 750-hour requirement. Regulation §1.469-5(f) provides that material participation is any work done by an individual in an activity in which the individual owns an interest at the time the work is done. That work is treated as participation by the individual in the activity, without regard to the capacity in which the individual does such work. Therefore, assuming he meets all other real estate professional qualifications, Freddy will be treated as materially participating in the rental business for the tax year, allowing him to deduct his losses against nonpassive income.