Participation is defined as any work a taxpayer does in connection with an activity in which he owns an interest. However, to be material the taxpayer’s participation must be on a regular, continuous, and substantial basis. For purposes of determining a taxpayer’s participation, a spouse’s activities will be attributed to the taxpayer.
The regulations under §1.469-5T(a) delineate seven tests to determine whether a taxpayer is involved in the operations of an activity on a regular, continuous and substantial basis. Six of those tests are applicable to rental activities. If a taxpayer meets at least one of the following six tests, he or she is treated as materially participating in the rental activity during the tax year.
Despite the above, safe harbor provisions exist when warranted by the facts and circumstances. Under these provisions taxpayers’ are automatically treated as materially participating if a minimum number of hours have been spent in prior years. For instance, if a taxpayer was a retired farmer he or she will be treated as materially participating in farming activity if there was material participation for 5 or more of the 8 years before retirement.