In this clip, Jose breaks down Gate #2: Material Participation, the second requirement many investors miss even after they qualify for REPS.
He explains the three most common tests investors rely on:
500-hour test: You spend 500 hours on the activity during the year.
Substantially all test: You do almost everything required for that activity.
100+ hours + no one does more: You work 100+ hours, and no manager/contractor/other person logs more time than you.
Then he addresses the big question: “If I have 5 properties, do I need 500 hours per property?”
That’s why the IRS allows a grouping election under Section 469, so you can group rentals into one activity and meet material participation on the aggregate.
But there’s a catch: grouping can delay releasing suspended losses. If you sell one property out of the group, you may not unlock those losses until all grouped properties are sold.
Bottom line: material participation and grouping are powerful, but they come with consequences you should model with your CPA before you elect anything.
