Material Participation & REPS Tracker

What is "participation" — §1.469-5(f) / -5T(f)

(f)(1) Any work done by an individual — without regard to the capacity — in connection with an activity in which the individual owns an interest is participation, except as the rest of (f) provides.

(f)(2)(i) Work not customarily done by owners is disregarded if a principal purpose is to avoid the passive-loss rules. Anti-abuse — excluded.

(f)(2)(ii)(A) Work in an investor capacity — studying/reviewing financial statements, preparing analyses for one's own use, monitoring in a non-managerial capacity — is not participation.

(f)(2)(ii)(B) Exception: that same work is participation if the individual is directly involved in the day-to-day management or operations of the activity. Investor work is not automatically excluded — a common error.

(f)(3) / §469(h)(5) A spouse's participation is counted, jointly filing or not, owner or not.

(f)(4) Proof by any reasonable means; a contemporaneous narrative log is the practical standard.

The seven tests — §1.469-5T(a)

(a)(1) >500 hours. (a)(2) substantially all the participation of all individuals (owners and non-owners). (a)(3) >100 hours and not less than any other individual. (a)(4) significant participation activities aggregating >500 hours. (a)(5) 5 of the prior 10 years. (a)(6) a personal-service activity, 3 prior years. (a)(7) facts and circumstances (100-hr floor; management limited by (b)(2)).

Pass-through coordination

§1.469-5(h)(3) A year in which the taxpayer materially participated in a partnership or S-corporation activity (and took its income/deduction into account under §1.469-2T(e)(1)) counts as a material-participation year when applying the (a)(5) and (a)(6) look-backs in later years.

§1.469-5T(e) An interest held as a limited partner can establish material participation only under Test 1, 5, or 6 — unless the individual is also a general partner in the same entity for the year ((e)(3)(ii)).