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rental operation qualifies as a "trade or business", Owners have material participation. It's understood that rental income is passive but in this instance does the fact that there is active participation in a trade or business qualify the rental income as being subject to SE tax?
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No. Unless "services" are provided (such as maid service, meals, etc.), rentals are not subject to Self Employment tax.
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"active participation", "material participation", "trade or business", "passive" lots of jargon there, but none of that is relevant for determining if a rental is subject to SE tax.
Rental activity is generally excluded from SE tax unless additional services are provided, above what would normally be expected when renting space. Treas Reg 1.1402(a)-4 covers the regs. In particular see (c) for residential rentals.
