Arete TOOLS · REAL ESTATE

Material Participation Evaluation Tool

Screen your participation against the seven tests and identify what to review with your tax advisor.

01 · Activity & participation

Activity being evaluated

Limited partner rules apply?LLC interests and special farming rules may need advisor review.

Your countable hours this yearOne activity, or an activity grouped under a valid applicable election. Exclude investor-only work.

Spouse’s countable hours in this activitySpouse participation can count for material participation.

Can you support the services and hours?Use calendars, logs, or other reasonable supporting evidence.

02 · Current-year tests

Was your work substantially all participation?Consider every individual, including contractors and managers. There is no fixed percentage safe harbor here.

Do you know the highest other individual’s hours?

Highest hours worked by another individualTest 3 compares you with any other person, not just owners.

Is this a qualifying significant participation activity?Non-rental trade/business, over 100 hours, without meeting another test.

Hours across all qualifying significant activitiesCount only activities qualifying for this specific test.

03 · Prior-year tests

Years materially participating in previous 10 yearsTest 5: at least 5 of the preceding 10 years.

Is this a personal service activity?Health, law, accounting, consulting, or another business where capital is not a material income-producing factor.

Prior years materially participating in this personal service activityTest 6: any 3 prior years; no 10-year limit.

04 · Facts & circumstances

Was participation regular, continuous, and substantial?Test 7 needs judgment and more than 100 hours.

Does this test rely on your management work?

Was another manager paid?

Did another person spend more time managing?