Want to unlock major tax benefits as a real estate investor? Learn how to qualify for Real Estate Professional Status (REPS) and why it can significantly reduce your tax bill.
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If you're investing in real estate or thinking about becoming more active in managing your properties, you've likely come across the term Real Estate Professional Status (REPS). This IRS designation isn’t just a title—it’s a powerful tax-saving strategy that can significantly reduce your tax bill.
In this guide, we'll break down what Real Estate Professional Status means, how to qualify, the tax benefits it provides, and tips for staying compliant. We'll also explore real-life examples to bring it all together.
Real Estate Professional Status (REPS) is a designation defined by the Internal Revenue Code §469, which generally limits your ability to deduct losses from passive activities—such as rental real estate—against your ordinary income (like W-2 wages or business income).
However, if you qualify as a real estate professional, your rental activities are not considered passive. That means you can deduct rental losses from your active income, potentially saving you thousands in taxes.
Rental real estate often generates paper losses due to depreciation and other non-cash deductions. These losses are typically passive losses, which the IRS limits unless you have passive income to offset them.
But if you qualify for REPS, you can use those losses to offset non-passive income, such as:
Let’s say Jane is a full-time consultant earning $150,000 and owns rental properties that generate a $50,000 loss (mostly from depreciation). If Jane qualifies as a real estate professional, she may be able to deduct the full $50,000 loss against her consulting income—cutting her taxable income to $100,000.
If she doesn’t qualify, that $50,000 loss would be suspended and carried forward to future years unless she has other passive income.
To qualify, the IRS requires you to meet two strict tests:
1. More than 750 hours of real property trades or businesses during the year.
2. More than 50% of your personal services for the year must be in real property trades or businesses.
You must meet both tests. And here’s the kicker: these hours must be material and personal, meaning you actually performed the work (not just supervised others).
You must spend at least 750 hours per year in real estate activities. That breaks down to roughly 14-15 hours per week.
This test requires that over half of your total working hours be in real estate.
So if you work 1,000 hours at your W-2 job and 600 hours on real estate, you don’t qualify—even if you exceed the 750-hour threshold.
This rule effectively disqualifies most full-time employees unless their primary job is in real estate.
If you file a joint tax return, only one spouse needs to qualify for REPS. This can be a smart strategy if one spouse works full-time in real estate while the other has a W-2 job.
However, only the spouse who qualifies can use their hours. You can’t combine hours between spouses to meet the thresholds.
The IRS typically treats each rental property as a separate activity for REPS qualification. That means you’d need to meet the 750-hour and 50% tests for each property, which is nearly impossible for most people.
You can file a Reg. §1.469-9(g) election with your tax return to aggregate all rental properties as one activity. This allows your time across all properties to count collectively toward REPS.
This election is critical and must be filed properly. Once made, it's binding for future years unless revoked with IRS consent.
Real estate professional status is heavily audited, and courts frequently deny REPS claims due to poor documentation.
Example Time Log Entry:
03/14/2025 – 2 hours – Responded to tenant complaints, coordinated plumbing repair at Maple Street Duplex.
Your documentation must withstand scrutiny. If it’s vague or reconstructed after the fact, the IRS may reject your REPS claim.
Hard to prove >50% of your working time was in real estate.
You might meet the hours across all rentals but fail each one individually.
Courts deny REPS all the time due to vague, inconsistent, or missing records.
Watching YouTube videos about real estate or scrolling Zillow doesn’t count.
If your modified adjusted gross income (MAGI) is below $100,000, the IRS allows a limited exception: you can deduct up to $25,000 of passive losses against active income—without REPS.
But this phases out between $100,000–$150,000 and disappears completely after $150,000 MAGI.
REPS, on the other hand, has no income limit and no cap on losses you can deduct—making it a major upgrade for higher-income taxpayers.
You should consider qualifying for REPS if:
Mark is a software engineer who earns $200,000/year and owns three rental properties generating $40,000 in losses. He works 50 hours a week at his tech job and manages his rentals on the side. Even though Mark hits 800 hours in real estate, he fails the 50% test, since real estate is less than half of his total work time. He can’t qualify for REPS.
Lisa is married to a surgeon and stays home to manage their five rental properties. She logs 1,000 hours per year across the rentals and files a grouping election. Lisa qualifies as a real estate professional. Her husband’s high W-2 income ($400,000) can now be offset by the $60,000 of losses from their rentals.
Tom is a licensed real estate agent who earns commissions and manages two rental homes. He logs 1,500 hours total in brokerage and rental activities. Since brokerage counts as a real property business, and he exceeds both hour requirements, Tom qualifies for REPS. He can deduct rental losses against his commission income.
Want to supercharge your tax savings?
you qualify for REPS, you can pair it with cost segregation—a strategy that accelerates depreciation deductions by reclassifying parts of the property (e.g., appliances, flooring, landscaping) into shorter lives.
This can create massive upfront losses in the first year, which you can now use to offset active income thanks to REPS.
Qualifying as a real estate professional isn’t easy—but for the right investor, it’s worth it. This status can unlock substantial tax savings by converting passive losses into powerful deductions against active income.
But proceed with caution: The IRS scrutinizes REPS claims closely. Be diligent with your records, understand the rules, and talk to a tax professional who’s well-versed in real estate tax law. If you’re serious about real estate investing, REPS could be your ticket to paying much less in taxes while building long-term wealth.
It’s very difficult. You must prove that over 50% of your total working hours are in real estate, which usually excludes full-time employees.
No. REPS is based on your time and services in real property trades—not licensure.
No. Rental income is generally not subject to self-employment tax, even if you qualify as a real estate professional.
Yes. If you don’t qualify for REPS, your passive losses are suspended and carried forward until you have passive income or sell the property.
Include a statement with your tax return stating your intent to group all rental activities under Reg. §1.469-9(g). Consult your CPA for proper formatting.
Being audited is comparable to being struck by lightning. You don't want to practice pole vaulting in a thunderstorm just because it's unlikely. Making sure your books are accurate and your taxes are filed on time is one of the best ways to keep your head down during tax season. Check out Vincere's take on tax season!
This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.
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