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Active vs. Passive Status for Real Estate Activities: Material Participation Rules, Short-Term Rentals, Real Estate Professionals

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Tuesday, June 10, 2025

Recorded event now available

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This webinar will distinguish the levels of participation classifications for real estate activities and their respective tax consequences. Our panel of astute real estate advisers will distinguish active, passive, and material participation and the requirements for real estate professionals (REPs). They will analyze recent real property cases, provide examples of real estate participation scenarios, and offer tax-saving suggestions for structuring real estate activities.

Description

IRC Section 469(c) defines a passive activity as any activity that involves the conduct of any trade or business in which the taxpayer does not materially participate. Real estate activities are, by default, passive. This classification limits a taxpayer's ability to deduct losses since passive losses can only absorb passive income. Passive losses accumulate until a taxpayer has passive income or the property is sold and the deduction is allowed. 

Investors often prefer to be classified as real estate professionals. This designation allows taxpayers to immediately offset passive income against ordinary income. Qualifications for real estate professionals are steep. They must spend more than one-half their time and more than 750 hours a year servicing the real estate trade or business. Additionally, they must pass a material participation test, separately for each property. These tests must be satisfied every year for the business to maintain REP status. An aggregation election is available that allows taxpayers to combine properties to meet the material participation test.

Short-term rentals have become more popular with the rise of rental services like Airbnb and Vrbo. Temp. Reg. Section 1.469-1T(e)(3)(ii) provides an exception to passive activity classification for qualifying tangible personal property used for seven days or less. This exception can provide planning opportunities for certain investors and their advisers.

Listen as our panel of federal tax experts clarifies the rules for active, passive, and material participation for real estate investors. 

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Outline

  1. Active vs. passive real estate investments: introduction
  2. Active participation
  3. Passive income
  4. Material participation
  5. Real estate professionals
  6. Short-term rentals
  7. Electing to aggregate rental activities
  8. Former passive losses
  9. Other considerations
    1. Net investment income tax
    2. 199A – Qualified Business Income deduction
  10. Examples
  11. Recent developments

Benefits

The panel will cover these and other critical issues:

  • The importance of real estate activity status in tax planning
  • Differences in passive, active, and material participation
  • How short-term rentals are classified for tax purposes
  • The criteria for real estate professional status

Faculty

Roberts, Wayne
Wayne Roberts, CPA
Senior Advisor
Hall CPA

Mr. Roberts is a Senior Advisor and Certified Public Accountant that specializes primarily in real estate at Hall...  |  Read More

Sosa, Nathan
Nathan Sosa, CPA, MST
Senior Advisor
Hall CPA

Mr. Sosa, CPA, MST, is the Manager of the National Tax Department and the Audit Defense Division at Hall CPA. He...  |  Read More

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