The Active Participation Test for a Redondo Beach Rental Owner

Published August 10, 2026

Active participation under 26 U.S.C. section 469(i)(6) requires at least 10 percent ownership by value plus real involvement in management decisions like approving tenants and setting rental terms. There is no minimum hours requirement, which makes it a lower bar than the material participation test.

The short answer

Active participation under 26 U.S.C. section 469(i)(6) requires two things: at least 10 percent ownership of the rental activity by value, including a spouse's interest, and real involvement in management decisions such as approving new tenants and setting rental terms. Unlike the real estate professional test, there is no minimum hours requirement. It is a deliberately easier standard to clear.

Last verified: August 10, 2026

Why this test exists separately from material participation

The passive activity loss rules in section 469 generally treat rental real estate as passive, which locks rental losses to offsetting only passive income. Section 469(i) opens a narrow exception: up to $25,000 of loss can offset nonpassive income like W-2 wages, but only for an owner who actively participates.

Active participation is not the same standard as material participation, which governs the separate and more demanding real estate professional exception under section 469(c)(7). IRS Publication 925 states directly that "active participation is a less stringent standard than material participation," and that unlike material participation, "you may be treated as actively participating if you make management decisions in a significant and bona fide sense," without needing regular, continuous, and substantial involvement in operations.

For a Redondo Beach owner renting out a single unit or a small duplex near the pier, this distinction matters. You don't need to run the property like a full-time job to qualify for the $25,000 special allowance. You need meaningful decision-making authority and a real ownership stake.

The 10 percent ownership floor

26 U.S.C. section 469(i)(6) states that "an individual shall not be treated as actively participating with respect to any interest in any rental real estate activity for any period if, at any time during such period, such interest (including any interest of the spouse of the individual) is less than 10 percent (by value) of all interests in such activity."

Two things to flag in that text. First, the 10 percent threshold is measured by value, not by a formula tied to income or cash flow, and it has to hold "at any time during such period," meaning a mid-year sale of enough of your interest to drop below 10 percent can disqualify you for that period. Second, your spouse's ownership interest counts toward your own for this test, so a married couple who each hold 6 percent individually still clears the 10 percent bar together.

The statute also closes an obvious workaround: "except as provided in regulations, no interest as a limited partner in a limited partnership shall be treated as an interest with respect to which the taxpayer actively participates." A passive limited partnership stake in a real estate syndicate does not qualify, no matter how large the percentage.

What "management decisions" actually means

Publication 925 gives concrete examples of the kind of involvement that satisfies active participation. Qualifying management decisions include approving new tenants, deciding on rental terms, and approving expenditures such as repairs or capital improvements.

| Decision type | Typically counts toward active participation |

|---|---|

| Approving or rejecting a tenant application | Yes, per Publication 925 |

| Setting the monthly rent or lease terms | Yes, per Publication 925 |

| Approving a repair or capital expenditure | Yes, per Publication 925 |

| Hiring and directing a property manager who then makes all these calls with no owner input | Generally no, this shifts the decision-making away from the owner |

| Passive receipt of a property manager's monthly report with no independent approval authority | Generally no, on the same reasoning |

The line that matters is who actually makes the call. A Redondo Beach owner who hires a local property manager to handle day-to-day leasing and maintenance can typically still satisfy active participation, as long as the owner is the one approving the tenant, the rent amount, or the larger repair bills rather than delegating that authority outright. An owner who hands over full decision-making discretion to a manager and never weighs in is on weaker ground.

No hours requirement, but keep records anyway

Nothing in section 469(i)(6) or in Publication 925 sets a minimum number of hours for active participation, which is the opposite of the real estate professional test's explicit 750-hour floor under section 469(c)(7). That said, the IRS can still ask you to substantiate that you actually made the management decisions you're claiming. Keeping a simple record, lease approvals, texts or emails approving a repair, notes on why you chose one applicant over another, protects you if the return is examined, even though the law doesn't specify a time log requirement the way it does for the real estate professional test.

FAQ

Do I need to personally show the property to prospective tenants to actively participate?

No. Publication 925's examples focus on decision-making authority, such as approving a tenant once found, not on performing every task yourself. Showing units and handling maintenance calls can be delegated to a property manager while you retain active participation, as long as you keep final approval on key decisions.

Can two co-owners who each hold less than 10 percent qualify if their combined stake is over 10 percent?

Only if they're spouses. Section 469(i)(6) explicitly counts a spouse's interest toward the 10 percent threshold. It does not extend that combination rule to unrelated co-owners, so two friends who co-own a property at 8 percent and 92 percent would be assessed individually on their own stakes, not combined.

Does active participation require material participation too?

No, they are separate and independent standards. Active participation, the lower bar, is what section 469(i) requires for the $25,000 allowance. Material participation is a higher bar tied to the real estate professional exception under section 469(c)(7) and has its own hours-based tests.

If I use a property management company, do I automatically fail the active participation test?

Not automatically. What matters is whether you retain and exercise real decision-making authority over things like tenant approval, rent terms, and major expenditures, even if a manager handles the daily logistics. Full delegation with no owner input is the scenario that puts active participation at risk.

Is the 10 percent ownership requirement measured annually or at a single point in time?

The statute requires it to hold throughout the relevant period, and specifically disqualifies you if your interest drops below 10 percent "at any time" during that period. A sale or restructuring mid-year that takes you below 10 percent can affect your eligibility for that period.

This is general information, not tax advice. Confirm your ownership percentage, the substance of your management involvement, and how any property management arrangement is structured with a CPA before relying on active participation status.

Topics: taxes, passive losses, section 469, active participation, Redondo Beach

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