The grouping election is a tax strategy that real estate investors use to minimize their tax burden. Do you own multiple properties or work another job that prevents you from passing the material participation test for your rentals?

If so, the grouping election is a valuable option for you. With this election, real estate investors can apply the material participation thresholds to a group instead of single properties, reducing their hourly requirements and potential tax burdens.

Grouping properties is complex and has significant effects on tax liability, so understanding the election is crucial. Let’s review the short-term rental loophole, then walk through the qualifications for the grouping election, benefits and drawbacks for this strategy, and tips on how to implement it successfully.

Key Points

• Grouping properties can help convert losses from passive to active for short-term rental investors.
• The election helps landlords who own multiple rentals qualify for material participation.
• Grouping properties has complex tax implications, especially for suspended losses.

Basics of the Short-Term Rental Loophole

The short-term rental (STR) loophole is a tax-planning strategy for rental property owners. This clever strategy allows you to convert rental losses from passive to active so you can use them against other active income, like W-2 wages. The STR strategy is especially useful for high-income earners because it helps minimize their tax burden.

Material Participation for Landlords

For the STR loophole to work, you must be able to prove that you’re actively involved in the daily operations of your rental—otherwise known as “material participation.” The IRS has seven criteria for material participation, but these are the three most commonly used for rental property owners:

1. You spend 500 hours or more on the operations of your STR.
2. You spend 100 hours or more on STR operations, and no one else spends more time on it than you do.
3. You do almost all the work yourself.

For a detailed discussion of the STR loophole, refer to this article.

Short-Term Rental Loophole for Multiple Properties

If you own multiple rental properties or work another job, qualifying for the STR strategy can be challenging. Passing the material participation tests is difficult because of the time required.

For example, if you try to use the first criterion, 500 hours, you’d need to spend over nine hours on each property every week. So, if you have another time-intensive job, this route probably won’t work for you.

If you have multiple properties, spending two hours on each property every week satisfies the time element of the second criterion, 100 hours. However, if you outsource tasks such as maintenance or cleaning, your subcontractors will likely exceed your 100-hour limit, meaning you wouldn’t qualify for material participation.

But the grouping election makes it possible for landlords with multiple properties or jobs to take advantage of the STR strategy.

The Grouping Election for Rental Properties

Under Treasury Regulation Section 1.469-4, property owners can group multiple STRs as a single activity to meet material participation requirements. That means the hourly thresholds apply to your portfolio (or a designated section of it).

Property owners can approach grouping in two ways:

1. You can group two or more rental properties as a single activity, making it easier to meet the material participation criteria.
2. You can combine a rental activity with an active business. For example, entity #1 owns short-term rentals, and entity #2 is an interior design business. Entity #2 handled the design for the rentals, and there’s enough qualifying overlap that you could group the two businesses.

Qualifiers for the Grouping Election

For this election, the IRS requires property owners to use a reasonable method to apply relevant facts and circumstances to their property groups, considering these factors:

• The activities are similar. The STR properties should have common traits. They could be located in the same market, focused on similar tenant types, or provide similar services.
• They have common control. The same entity or person should control both properties.
• The properties have common ownership. When you own all the rentals, the IRS is more likely to approve the group.
• They are in the same region. Group properties by location, focusing on the same city, state, or region.
• The properties have interdependent activities. Having an overlap between management, marketing, or services for the properties helps prove the grouping connection.

You can choose the grouping election for properties even if they don’t meet all these factors. Just ensure that the groupings are logical and share multiple factors.

The Benefits of Grouping Properties

Grouping STRs comes with several benefits. You’ll save time by distributing the material participation time requirements across part of your portfolio instead of hitting individual hourly targets. The grouping election also simplifies your recordkeeping since you can consolidate reporting.

Grouping STRs helps with more than just admin, though. This strategy also allows you to convert passive losses to active so you can maximize tax deductions and increase your overall profitability.

Pro tip: Grouping elections that include buildings may benefit from cost segregation studies because other entities within the grouping can use the depreciation deductions.

Drawbacks of the Grouping Election

The grouping election is complex, so before committing to it, consider the challenges.

Support and Detailed Records Are Required

Material participation calls for detailed records. Track every hour you and your spouse spend on each property. If the IRS audits you, you’ll need the records (as well as support from a tax professional) to prove your material participation. The grouping election takes planning, so choose a CPA with STR tax experience.

Your CPA can also help with the necessary annual reviews. Grouping requirements can change annually, so you’ll need to review your elections and material participation status each year to ensure you’re meeting all the requirements.

Did you know? Backdating a group election is possible, so you can legally amend prior years’ returns as needed. Consult with a CPA who has real estate experience to weigh the pros and cons of the grouping election for your situation.

Suspended Passive Losses

With rental property, you may sometimes have losses that you weren’t able to deduct in prior years. Perhaps you didn’t meet the material participation test or didn’t have enough passive income to offset them. These are known as suspended losses.

Typically, you carry those losses forward and net them against passive income in future years. And when you sell the property, you can use suspended passive losses to offset passive income, plus active income and capital gains.

But with the grouping election, the rules change for suspended passive losses.

Once you group properties, any suspended losses apply to the group. Losses from a single property within the group are only accessible when you sell all the properties in the group. This rule means you have less flexibility with your properties and delays potentially tens or hundreds of thousands of dollars in tax savings.

How to Make the Grouping Election

If you choose to group properties, you must attach a statement to your tax return and file it by the due date for the year you want the election applied to. This option is available for individuals, C corps, S corps, partnerships, trusts, and estates.

Remember, though, once you form a group, the grouping must remain the same, except in these circumstances:

• The IRS deems the group inappropriate.
• A material change in facts or circumstances requires a grouping change.
• The IRS concludes that the group’s primary purpose is to circumvent the rules of IRC §469.

How to Successfully Group Properties

The grouping election is a complex and powerful tax strategy for STR owners. Follow these tips to group your properties successfully:

• Document your material participation. Maintain logs documenting your hours and tasks performed, such as marketing, cleaning, maintenance, bookkeeping, or tenant communication.
• Keep accurate financial records. You’ll need clear, organized books and supporting documentation to prove your income and expenditures.
• Track personal use of the properties. If you use a rental for more than 14 days or 10% of the total rental days per tax year — whichever figure is greater — then the property counts as a personal residence. That disqualifies the rental as a business activity and affects the grouping status.
• Work with an experienced tax adviser. The STR loophole and grouping election are complicated and have profound tax implications. A CPA with real estate experience can help evaluate your specific situation and recommend the best choices for you and your portfolio.

REI Hub: Accounting Software Built for Landlords

The grouping election can be tricky, but that doesn’t mean managing your books has to be a headache. REI Hub offers accounting software designed specifically for landlords, making it easier to track income and expenses, stay organized, and prepare for tax time.

Simple Setup, Smarter Bookkeeping

REI Hub simplifies the setup process by using a default chart of accounts aligned with IRS Schedule E categories—no customization required. We offer built-in templates for typical real estate transactions, such as loan payments, management statements, and security deposits, so you’re never left guessing how to record entries.

Even first-time investors appreciate the user-friendly experience.

“As a first-time real estate investor in STR properties, I struggled to find a bookkeeping software that fit my needs and budget. I was lucky enough to stumble upon REI Hub, and it has been a total slam dunk!” —Chris Barritt, rental property owner and happy REI Hub user

Designed for Portfolios of Any Size

Whether you manage one unit or a dozen, REI Hub helps you stay in control. Import transactions from your bank accounts, set up rules and recurring entries, and reduce bookkeeping errors. Access all your lease information—including rent amounts, deposits, and due dates—in one place.

Need to log expenses or upload receipts while on the go? Use the REI Hub mobile app to make updates while you’re away from your desk.

There’s no need to worry about tiered service levels either. We include every feature, report, and support option in your subscription, no matter how big or small your portfolio is.

Reporting That’s Built for Real Estate

Unlike general accounting tools, REI Hub delivers real estate–specific reports at the portfolio, property, and unit levels. We help you track performance with rent rolls, cap rate, net operating income, and cash-on-cash return metrics.

Plus, we offer comprehensive financial reports, including balance sheets, income statements, cash flow, fixed asset schedules, and more.

“The reports are so helpful, easy to use, and clear! I wish I would have done this sooner!”

Tax Features That Save You Time

REI Hub includes built-in tax tools to make year-end prep simple. Use our digital receipt storage, mileage logs, and depreciation templates to maximize your deductions.

Ready to review your books for the year? Our Tax Review flags commonly missed items, while the Tax Packet Export compiles the most relevant reports (like the Schedule E Report) for your CPA, saving you time and stress.

Need to give your accountant direct access to your books? No problem. We make it easy to securely share your portfolio with your business partners or tax preparers.

Seamless Integrations with Property Management Tools

Do you already use TurboTenant or RentRedi? REI Hub integrates with these property management platforms to automatically import lease and revenue data. Your transactions are mapped to the correct units and properties, making setup and ongoing tracking seamless.

Five-Star Support and Resources

REI Hub offers a demo portfolio and full knowledge base with how-to guides and quick-start tutorials. Need personalized help? Our US-based support team is just a phone call or email away, and we’ve got great reviews from happy clients, like Aimee:

“Their software is easy to navigate and has great features, but best of all is their outstanding, personal customer service! I literally talk to a live person quickly and easily and get the help and follow-up I need every time. Highly recommend!”

Simplify Your Rental Property Bookkeeping Today

Ready to see how simple rental accounting can be? Streamline your finances and stay tax-ready with REI Hub. Sign up for our free 14-day trial today!