Page 1: What Is Material Participation in Real Estate?
If you own rental properties, you may have heard the term material participation before. But what does it mean? Simply put, the IRS wants to know how much you actually work on your real estate activities. If you work enough hours, you are considered to “materially participate.”
When you materially participate, you might be able to deduct real estate losses on your taxes. This can save you a lot of money. But the rules can be tricky.
Most people think rental real estate is always “passive.” That means they can’t use losses to lower their other income, like from a job or business. But there’s a way to change that: Grouping real estate activities to meet material participation.
Let’s say you own five different rental homes. On their own, each home doesn’t have enough hours worked to count as material participation. But if you group them together, your total time might be enough. That’s where grouping comes in.
Page 2: Why Grouping Real Estate Activities Is So Important
The IRS has rules for grouping real estate activities. These rules help you combine all your properties into one activity. When you do that, the hours you work on all of them count together. This makes it easier to prove that you materially participate.
Here are the rules to follow:
- Common Control – You must own the properties yourself or through entities you control.
- Same Type of Activity – The rentals should be similar, like long-term rentals or short-term rentals.
- Geographic Area – The properties should be in a close area, like the same city or state.
When you follow these rules, you can send an election to the IRS to say you’re grouping real estate activities to meet material participation. You only have to do this once, and it stays in place for the future, unless you change your mind or buy new kinds of properties.
Let’s take an example. You spend:
- 100 hours on Property A
- 60 hours on Property B
- 90 hours on Property C
Each one is under 500 hours, but if you group them, that’s 250 hours total. That may be enough to meet one of the IRS tests for material participation.
Page 3: How Grouping Helps You Save on Taxes in 2025
In 2025, tax laws still favor real estate owners who participate in their rental activities. If you qualify as a Real Estate Professional and you’re grouping real estate activities to meet material participation, you can deduct losses from your rentals against your job or business income.
This is important because:
- You can reduce your taxable income.
- You may qualify for bonus depreciation.
- You could avoid the 3.8% Net Investment Income Tax.
To qualify as a Real Estate Professional, you need:
- More than 750 hours in real estate activities during the year.
- More hours in real estate than in any other job.
But even if you meet those tests, you still have to prove material participation. That’s why grouping real estate activities to meet material participation is so useful. It helps you meet the hours test by letting you combine time spent across all your rentals.
Important Tip for 2025: Keep good records. Write down the time you spend managing, fixing, and handling your rentals. Use a spreadsheet or a calendar. If the IRS ever checks, they’ll want to see proof.
Final Thoughts
Grouping real estate activities to meet material participation is a smart tax strategy in 2025. It lets you use all the hours you spend on different rentals to show you’re active in your business. This can unlock big tax benefits, especially if you’re a Real Estate Professional.
Make sure you:
- Understand the grouping rules.
- File your grouping election with the IRS.
- Track your time carefully.
- Talk to a tax advisor to make sure you qualify.
By planning ahead and grouping wisely, you can save money and make your real estate work even more rewarding in 2025.
