Real estate can be a powerful tax strategy. But you must know how to play by the IRS’s rules. One of the most important (and often misunderstood) designations is Real Estate Professional Status (REPS). For investors, landlords, and small business owners with real estate holdings, qualifying as a materially participating real estate professional can mean the difference between a massive tax refund and years of losses collecting dust before they can be applied.
This article covers everything you need to know about qualifying, changing your situation if necessary, and avoiding the common pitfalls that could knock you out of REPS.
What is Real Estate Professional Status?
REPS is a special designation under the IRS tax code that allows certain taxpayers to treat rental real estate losses as non-passive. Why does this matter? Because passive losses are typically limited; you can only deduct them against passive income. But non-passive losses? Those can offset your W-2 income, self-employment income, or profits from other businesses.
For small business owners with real estate holdings or for anyone anticipating large real estate losses, qualifying for REPS can result in thousands of dollars in tax savings.
So, who can qualify? The short answer: individuals who spend most of their working time actively involved in real estate trades or businesses. That includes landlords, developers, real estate agents, flippers, and property managers if they meet the requirements.
What are the key IRC rules and regulations for REPS qualification?
REPS is governed by Internal Revenue Code (IRC) Section 469 and the accompanying treasury regulations. These rules were designed to limit the ability of passive investors to deduct losses against other types of income, but they also outline a clear exception for individuals who meet the real estate professional criteria.
Here’s what the law requires:
- You must perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate.
- More than 50% of your personal services for the year must be in real property trades or businesses.
Material participation is another key component. It means you’re not just a silent investor; you’re actively involved. The IRS provides seven tests to measure material participation, and meeting just one is enough:
- You participated for more than 500 hours during the year
- Your participation was the most substantial in the activity (i.e., no one else was involved more than you)
- You participated for more than 100 hours, and no one else participated more than you
- The activity is a significant participation activity, and your total time across all such activities is more than 500 hours.
- You materially participated in the activity for any 5 of the last 10 years
- The activity is a personal service activity, and you materially participated in it for any 3 prior years, they do not have to be consecutive
- Based on all facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis
One more technical point: if you own multiple rental properties, you may need to make an election to aggregate them in order to meet the participation requirements. This is a one-time election made on your tax return, and it can make a big difference in how your hours are counted. This may be the time to consult a CPA to see if you qualify and if this is the right choice for you.
How can you change your situation to qualify as a Real Estate Professional?
A big part of qualifying for REPS is about how you spend your time and how your work is structured. That’s where adjusting your situation comes into play.
Increasing Hours Worked in Real Estate
To reach the 750-hour mark, you need to be hands-on. Qualifying activities include collecting rent, supervising repairs, managing tenant issues, marketing units, and conducting walkthroughs.
What doesn’t count? Time spent researching new properties, reading articles, or traveling to look at real estate. These may feel like work, but they don’t qualify in the IRS’s eyes.
Here are a few ways to shift your situation:
- A part-time investor who hires a property manager may not qualify. But if they take over those duties themselves, they could.
- A short-term rental owner might outsource cleaning and guest communication. If they begin doing it themselves, that time could count toward REPS hours.
Reframing Primary Business Focus
To meet the more-than-50% rule, real estate must be your main line of work. If you work full-time in another industry, it’s unlikely you’ll qualify.
Example: Sarah is a full-time nurse who also owns rental properties. She spends 1,800 hours a year at her job and 400 on real estate. She doesn’t qualify. But, if she switches to part-time nursing and ups her real estate involvement to 800 hours, she now meets both requirements.
Be Careful Leveraging Family Involvement
This is a common area of confusion. You can’t combine your hours with a spouse or other family member. The IRS looks at each individual separately.
So, if your partner manages the properties but your name is on the tax return, you can’t count their hours toward your total. Each person has to qualify independently.
What documentation is necessary to prove REPS qualification?
If you’re going to claim real estate professional status, documentation is everything.
Keep a time log that shows:
- Dates of activities
- Description of work performed
- Number of hours spent
- Which property the work related to
You don’t need to use a fancy system. A simple spreadsheet or calendar will do as long as it’s detailed, consistent, and can be backed up with other records like emails, invoices, or appointment confirmations.
| 🗓️Pro tip: Don’t wait until tax time to start tracking. Maintain your log as you go throughout the year. |
What are the common pitfalls to avoid when pursuing REPS?
Here are the biggest mistakes we see:
- Skipping the aggregation election: If you own multiple rental properties and don’t make the election to treat them as one activity, it’s harder to meet the participation test
- Counting non-qualifying activities: Reading real estate news or scouting new markets doesn’t count toward your hours
- Failing to keep records: No documentation means no deduction if the IRS questions your claim
Real-Life Examples
Let’s bring this to life with a few scenarios.
Case Study 1
Jenna owns four long-term rentals and works full-time in HR. She wants to use her real estate losses to offset her salary but doesn’t qualify. She quits her corporate job, becomes her own property manager, and puts in over 800 hours annually. She now qualifies as a real estate professional.
Case Study 2
Marcus and his wife own vacation rentals. Marcus works full-time in finance, but his wife spends 900 hours a year managing bookings, communicating with guests, and maintaining the properties. She qualifies for REPS, but he doesn’t. They can still file their taxes as Married Filed Jointly, but the REPS statute only applies to her income.
Case Study 3
David owns six rental homes and had a property management company handling everything. He takes back full control—collecting rent, doing repairs, and marketing vacancies—and tracks 780 hours over the year. Now, he meets the REPS threshold.
How can you use REPS to maximize benefits for your business?
Once you qualify, real estate losses become non-passive, which means they can offset any other income you earn. This is a game-changer if you’re expecting a high-income year, or if you have large losses due to depreciation or renovations.
You can also plan your year strategically:
- Time major repairs or capital improvements in a year you qualify
- Group multiple rentals together for efficiency and easier tracking
- Use accelerated depreciation methods to create large paper losses that save you real money
The Bottom Line
Qualifying as a real estate professional takes planning and documentation, but the payoff can be substantial.
To get started, take an honest look at how much time you’re spending on real estate versus other work and begin tracking those hours. Shift responsibilities to take on more qualifying activities and reduce hours in non-real estate jobs, if possible.
If you’re ready to make your real estate investments work harder for you, consult a tax advisor who understands REPS and can help you structure your business strategically. We’re here to help you do it right.
