In this Episode of the Teaching Tax Flow Podcast, hosts Chris and John are joined by Jeremy Wells, PhD, CPA, EA, to unravel one of the most misunderstood areas in tax strategy — Material Participation.

Jeremy, known for blending his academic background with real-world tax expertise, breaks down what truly defines material participation and why it matters so much for real estate investors, high-income earners, and business owners. This episode provides a clear and actionable discussion of IRS Section 469, passive activity rules, and how to correctly apply the “seven tests” to determine whether income is passive or active.

Listeners will gain practical insights on documentation, common misconceptions, and how education remains key to staying compliant while maximizing benefits.

Key Takeaways

• Material participation determines whether you can use passive losses to offset active income.

• The IRS defines seven tests for material participation under Section 469 — understanding which applies to your situation is critical.

• Proper documentation (time logs, spreadsheets, or tracking apps) is essential for substantiating material participation claims.

• Not every real estate investor qualifies as a “real estate professional” for tax purposes — W-2 employees often don’t meet the test.

• Continuous education is vital for both tax professionals and clients to navigate evolving tax law and avoid misinformation.

Notable Quotes

• “We can’t really shut down bad information. All we can do is fight against it with good information.” — Jeremy Wells

• “The goal here, if you’re the taxpayer, is to try to have active income offset with those passive losses.” — Jeremy Wells

• “Just because you have a real estate license doesn’t make you a real estate professional for tax purposes necessarily.” — Jeremy Wells

• “You need to keep that contemporaneous log… just like mileage tracking for your real estate portfolio.” — Jeremy Wells

• “Education is still a key part of the work that I’m trying to do.” — Jeremy Wells

Resources

• Teaching Tax Flow Website: https://www.teachingtaxflow.com

• Defeating Taxes Community: https://www.defeatingtaxes.com

• Teaching Tax Flow YouTube Channel: https://www.youtube.com/@TeachingTaxFlow

Episode Sponsor:
Strategic Associates, LLC
Roger Roundy
www.linkedin.com/in/roger-roundy-86887b23

• (00:00) - Demystifying Material Participation for Taxpayers and Investors