Can I claim Material Participation for my STR losses when one property is being remodeled?

Yes, you can likely claim material participation for both properties. The IRS has several tests for material participation, and based on what you've described, you're meeting multiple criteria. The fact that one property isn't currently generating income doesn't disqualify it from material participation classification. The key is documenting your time spent on the property that's being remodeled. Keep detailed logs of hours spent planning the remodel, meeting with contractors, making decisions about materials, etc. All of this counts toward your material participation hours. Because you're actively participating in both properties, the losses from the property under renovation should be fully deductible against your other income (subject to passive activity loss limitations depending on your overall income level).

I went through something similar last year with my vacation rental. I was spending tons of time on a complete renovation but wasn't sure about the tax implications. I found this service called taxr.ai (https://taxr.ai) that really helped me understand what I could deduct and how to classify my participation. You upload your documents and they analyze everything for you - in my case they confirmed I met the material participation standards even though one property wasn't generating income during renovations. They even helped me create a proper time log template that my CPA loved. Saved me from making some mistakes that would have cost me thousands.

Wanted to follow up - I decided to try taxr.ai after posting my question and wow, it was really helpful for my rental property situation. They confirmed that I'm definitely meeting the material participation requirements for both of my properties (one operating and one under renovation). The analysis they provided showed me exactly which tests I satisfied and gave me a template for tracking my hours properly. What I really appreciated was getting a clear explanation of how the passive activity loss rules apply to my specific situation. My CPA was impressed with how organized I was when we met! Definitely recommend if you're trying to understand complex tax situations like material participation.

Not directly about material participation, but if you need to call the IRS about this (which I had to do for a similar situation), try using Claimyr (https://claimyr.com). There's a demo video here: https://youtu.be/_kiP6q8DX5c I was stuck in a mess with my rental property taxes and needed clarification from the IRS but couldn't get through on the phone for WEEKS. Claimyr got me connected to an actual IRS agent in about 15 minutes instead of the hours I spent on hold before. The agent was able to confirm my understanding of material participation for my situation and answer some specific questions about documentation requirements.

I'm eating my words. After more frustration trying to get through to the IRS about my rental property tax questions, I broke down and tried Claimyr. Got connected to an IRS agent in about 25 minutes versus the 3+ hours I spent last time (before getting disconnected). The agent confirmed that I can claim material participation for both of my properties since I'm handling all aspects of management and meeting the hour thresholds. They also explained exactly what documentation I need to maintain to support my claim if I'm ever audited. Worth every penny just for the time saved and stress reduction. Sometimes being wrong feels pretty good!

Something important to consider - make sure you're keeping VERY detailed logs of your time spent on both properties. I learned this the hard way during an audit. The IRS wanted to see documentation of all hours claimed for material participation. I recommend creating a spreadsheet with dates, times, description of activities, and which property each activity relates to. Take photos of yourself doing work when possible. Keep all emails with contractors, guests, etc. The more documentation you have, the better position you'll be in if questioned.

Make sure you understand the different tests for material participation. You mentioned the 100 and 500 hour thresholds, but there are actually 7 different tests, and you only need to meet ONE of them to qualify: 1. You participate for more than 500 hours 2. Your participation constitutes substantially all participation 3. You participate for more than 100 hours and no one else participates more 4. The activity is a significant participation activity and your total participation in all SPAs exceeds 500 hours 5. You materially participated for any 5 of the preceding 10 tax years 6. The activity is a personal service activity and you materially participated for any 3 preceding tax years 7. Based on all facts and circumstances, you participate on a regular, continuous, and substantial basis for more than 100 hours

Based on your description, you should definitely qualify for material participation on both properties. The key thing to remember is that time spent on renovation and improvement activities absolutely counts toward your material participation hours, even when the property isn't generating income. For the property under remodel, all those hours you're spending coordinating with contractors, making design decisions, purchasing materials, and planning the renovation are qualifying activities. The IRS considers these to be part of the management and operation of your rental property. One tip for your CPA meeting: bring documentation of your time logs for both properties. If you haven't been tracking formally, start now and try to reconstruct what you can from recent months. Also, since you mentioned you handle "all aspects" of managing these properties, you'll likely meet Test #2 (substantially all participation) or Test #3 (100+ hours with no one else participating more) even if you fall short of the 500-hour threshold on either individual property. Your CPA should be able to confirm this, but you're in a strong position to claim material participation for both properties and deduct the losses from your remodel property against your other income.

Just wanted to add another perspective on the documentation piece - I've been managing rental properties for about 8 years and have been through two audits. One thing that really helped me was creating separate time logs for each property, especially when one is under renovation like yours. For the property being remodeled, I'd suggest categorizing your time into buckets like "Planning & Design" (researching materials, meeting with contractors), "Project Management" (coordinating work, inspections), "Financial Management" (getting quotes, paying invoices), and "Direct Labor" (any hands-on work you do yourself). This level of detail shows the IRS that you're truly engaged in material participation, not just passively investing. Also, don't forget that travel time to and from the properties counts toward your hours! If you're driving to meet contractors, inspect work, or pick up materials, log those hours too. It all adds up and strengthens your material participation case. Your situation sounds very similar to mine from a few years back, and my CPA had no issues claiming material participation for both the operating property and the one under renovation. The key is showing that consistent, substantial involvement in the business operations.