Material Participation

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Material Participation defines whether or not a trade or business activity is considered passive. Rental activities, as opposed to trade or business activities, are always assumed to be passive. Material participation only comes into play for rental activities when the taxpayer is a real estate professional.

A taxpayer is considered to have materially participated if he/she meets the following tests:


1. Taxpayer participated in the activity for more than 500 hours.

2. Taxpayer's participation was substantially all the participation in the activity of all individuals for the tax year, including those individuals who did not own an interest.

3. Taxpayer participated at least 100 hours and participated at least as much as any other individual.

4. Activity is a significant participation activity, and the taxpayer participated in all significant participation activities more than 500 hours during the year. A significant participation activity is any activity in which the taxpayer participated at least 100 hours during the year and in which he/she did not materially participate under any other material participation test. This means that any activity in which he/she participated more than 500 hours cannot be a significant participation activity.

5. Taxpayer materially participated in any 5 of the previous 10 years.

6. Activity is a personal service activity in which the taxpayer materially participated in any 3 previous tax years.

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