Material participation for a short-term rental means satisfying one of the 7 tests in Treasury Reg 1.469-5T(a). The 7-day average stay rule in Reg 1.469-1T(e)(3) only removes the automatic passive label; material participation is what actually makes the losses deductible against wages and other active income.
The three tests that matter in practice
Most short-term rental owners rely on one of these:
- 500 hours. You participate more than 500 hours in the activity during the year. Rare for a single property.
- Substantially all. Your participation is substantially all of the participation by anyone, including non-owners. This fails the moment a cleaning crew or co-host does meaningful work.
- More than 100 hours and not less than any other individual. The workhorse test. You need over 100 hours and no single other person, employee or contractor included, can out-hour you.
Spouses get help from IRC section 469(h)(5): a spouse's participation counts as yours, even on a separate return.
Which hours count
Time spent on guest messaging and booking management, pricing and listing updates, turnovers you perform yourself, repairs and maintenance, supply runs, and furnishing or staging the unit all counts. Investor-type work generally does not. Reg 1.469-5T(f)(2)(ii) excludes activities such as reviewing financial statements and monitoring operations in a non-managerial capacity, and travel time is frequently challenged on exam. Padding a log with research and drive time is the fastest way to lose the position.
Cleaner and manager hours work against you
The comparison test measures you against each other individual separately, and it runs alongside the requirement that your own hours exceed 100. If your cleaner logs 110 hours and you log 105, you fail, because another individual participated more than you did. If the cleaner logs 95 hours and you log exactly 100, you also fail, because 100 hours is not more than 100. Ties on the comparison itself are fine, since the standard is not less than any other individual. Hiring a full-service property manager usually ends the analysis, since the manager's team will dwarf your hours and the substantially-all test is long gone.
A worked example
A couple self-manages a $700,000 ski condo. The owner logs 115 hours across the year on messaging, pricing, two turnovers a month, and repairs. The spouse logs 25 hours on supply runs and staging, for 140 combined hours under section 469(h)(5). The cleaner logs 90 hours and a handyman logs 12. The couple has more than 100 hours and more than any other individual, so the 100-hour test is met and the year's cost segregation loss is non-passive.
Documentation that survives audit
Reg 1.469-5T(f)(4) allows participation to be shown by any reasonable means, including appointment books, calendars, and narrative summaries. Courts have been openly hostile to after-the-fact estimates, so a contemporaneous log beats a year-end reconstruction every time. Keep platform message exports, cleaning invoices, and mileage records together. Remember the test is annual: passing in the cost segregation year does not carry over, and losses from a later non-qualifying year are passive. Amadae's tax preparation applies these tests when it files the return that carries the accelerated depreciation.