Material participation
Material participation is a factual determination about a person's work and involvement in managing property or a business. For owners of farms, businesses, real estate, and private investments, the term appears in a federal special-use valuation rule for certain property. Passive rent collection, advancing capital, or reviewing plans and reports alone is insufficient.
How it works
Material participation depends on the facts. Physical work and participation in management decisions are principal factors, but no single factor determines the result. The decedent or a family member must regularly advise or work with the other managing party.
Full-time employment of the decedent or a family member means 35 hours a week or more. That work constitutes material participation. Lesser work can qualify when it is personally needed to fully manage the farm or business.
Where it shows up for owners of businesses, real estate and private investments
Material participation is one condition in the federal special-use valuation rule under section 2032A. The rule also requires specified ownership and use of the property for five of the eight years before death.
Indirectly owned real property has an additional condition. Even full-time involvement must follow an arrangement between the entity and the decedent or a family member that specifies the services to be performed.
Points that are easy to confuse
A nominal officer or director role, salary, partnership status, or profit sharing alone is insufficient.
Cash rent does not qualify for the qualified heir standard described for a farm operation. That standard includes some financial risk and active participation in management decisions.
Common questions
Does collecting rent establish material participation?
Passive collection of rents or other income is insufficient by itself.