spends more than one-half of their total services in real property trades or businesses in which there is “material participation,” and
performs at least 750 hours of services per year in real property trades or businesses.
What is material participation?
In order to be considered to have material participation in an activity, an individual must meet one of the following criteria:
The taxpayer participates in the activity for more than 500 hours during the year;
The taxpayer’s participation in the activity constitutes substantially all of the participation in such activity of all individuals;
The taxpayer participates in the activity for more than 100 hours during the taxable year, and that participation is not less than the participation of any other individual;
The activity is a significant participation activity (as defined in the regulations), and the individual’s aggregate participation in all significant participation activities during the year exceeds 500 hours;
The taxpayer materially participated (determined under one of the other criteria) in the activity for any five taxable years (does not have to be consecutive) during the ten taxable years that immediately precede the taxable year;
The activity is a personal service activity (as described in the regulations), and the individual materially participated in the activity for any three taxable years preceding the taxable year; or
Based on all the facts and circumstances, the individual participates in the activity on a regular, continuous and substantial basis during such taxable year.
Can limited partners meet the material participation threshold?
Limited Partners in an activity are generally treated as not materially participating. The exception to this rule is if they meet the criteria under 1, 5, or 6 above.