Unleash the Power of the Real Estate Professional Status (REPs)

What is a Real Estate Professional Status (Reps)?

Real Estate Professional Status (REPS) is an IRS designation under IRC Sec. 469(c)(7) that lets qualified investors treat rental real estate losses as non-passive, unlocking powerful tax benefits. By definition, the IRS designates any rental activity as “passive”, regardless of how much time you invest in that activity. The IRS also loves to make exceptions, which is where the ‘real estate professional’ designation comes into play.

A real estate professional that materially participates in rental real estate activities is not subject to the rule that treats all rental activities as passive, and may enjoy ordinary losses from their qualifying rental activities, without limitation.

You are a Real Estate Professional if…

1. You own rental real estate.
2. You perform more than 750 hours of personal services in a real property business that you materially participate in.
3. At least half (50%) of all your personal services are performed in a real property business that you materially participate in.

☝️ Time spent on education and research are not considered personal service hours

Who Qualifies for REPs status?

If you meet the three tests to qualify as a real estate professional, congrats! You’ve conquered the first hurdle on the journey to enjoying some nice tax benefits.

🔑 In order to overcome the passive loss limitations for rental real estate, you must:

☑️ Qualify as a real estate professional and

☑️ Materially participate in the specific rental real estate activity that’s generating a loss

You have Material Participation if…

At a high level, material participation is achieved if you participate in an activity on a regular, continuous, and substantial basis during the year. To demonstrate this, you must meet at least one of the following seven tests:

1. You participated in the activity for more than 500 hours during the tax year.
2. Your participation was substantially all of the participation in the activity of all individuals for the tax year.
3. You participated in the activity for more than 100 hours during the tax year and participated in the activity at least as much as any other individual for the tax year.
4. The activity is a significant participation activity and your participation in all significant participation activities exceeds 500 hours.
5. You materially participated in the activity for any five of the preceding ten tax years.
6. The activity is a personal service activity and you materially participated for any three (whether or not consecutive) preceding tax years.
7. You participated in the activity for more than 100 hours during the tax year and you satisfied a facts and circumstances test proving that you participated on a “regular, continuous, and substantial” basis. Your participation in managing the activity does not count in determining whether you materially participated under this test if
   
   
   1. Any person other than yourself received compensation for managing the activity, or
   2. Any individual spent more hours during the tax year managing the activity than you did (regardless of whether they were compensated for the management services).

Activities the IRS Counts Towards Hours

Your activities count if…

• Managing tenants (leasing, advertising, screening)
  
  
• Handling repairs or maintenance directly
  
  
• Supervising contractors or vendors
  
  
• Performing property inspections
  
  
• Collecting rents and addressing tenant issues

Your activities don’t count if…

• Time spent studying or attending education courses
  
  
• Purely investor-level activities (reviewing reports, financial analysis)
  
  
• Travel that’s not directly tied to hands-on property management
  
  
• Delegated work performed entirely by a property manager without your involvement

Special Circumstances

Depending on your personal situation, there may be some additional factors to keep in mind when evaluating material participation

• Married Individuals: Any participation in activity by you or your spouse will qualify as participation for these tests, regardless of filing status and/or ownership interest in the activity.
• Employees and minority owners: You must directly or indirectly own at least 5% stake in an activity in order for your time to qualify as participation for these tests.
• Limited Partners (LPs): Material participation is only available to LPs meeting tests #1, #5 or #6. Keep this in mind if you plan to group LP interest in real estate syndicates to claim losses.

Grouping Rental Real Estate Activities Under IRS Rules 

The IRS recognizes eleven types of real property trades or businesses, including development, construction, acquisition, conversion, rental, operation, management, leasing, and brokerage. If you work across different real estate roles—say as an agent, builder, or property manager—you can combine your hours in these areas to meet the 750-hour and “more than half your time” tests for Real Estate Professional Status.

Separately, election 1.469-9 lets you elect to treat all your rental properties as a single activity instead of tracking each property on its own. This can make it easier to show material participation, though it also means suspended losses are tied to the combined group rather than individual properties. rental activity are triggered.The election to group rental activities is often advantageous because it makes it easier to use current-year losses, but it also means suspended losses can only be used when the entire group is disposed of, not when individual properties are sold. In short, you get more immediate benefits, but you may have to wait longer to use older losses.

Participation Guidelines

Any "participation" is counted unless it’s primarily performed to avoid the passive loss rules.

Proof of Participation

Your participation in an activity may be established by any reasonable means.

Reasonable means usually involves identifying services performed and the approximate number of hours spent performing those services over a period of time. This can involve:

• Calendars
• Work product and notes
• Appointment confirmations, or
• Narrative summaries

Contemporaneous daily time reports, logs, or similar documents are not required if the extent of your participation may be established by other reasonable means.

☝️ Although the regulations permit some flexibility, they do not allow a post event "ballpark guesstimate" of time committed to participation in a rental activity or your own unverified, undocumented testimony.

Investor Participation Limitations 

Investors cannot "participate" unless they are directly involved in the day-to-day management or operations of the investments. Work performed as an investor includes:

1. Studying and reviewing financial statements or reports on operations of the activity
2. Preparing or compiling summaries or analyses of the finances or operations of the activity for the taxpayer's own personal use
3. Monitoring the finances or operations of the activity in a non-managerial capacity.

Documenting Your REPS/Material Participation Hours 

The IRS requires you to maintain contemporaneous records that clearly show how you spend your time in real estate activities. A general estimate or a spreadsheet built after the fact usually won’t pass scrutiny.

To strengthen your position, keep:

• Daily or weekly logs that outline tasks, time spent, and properties involved
  
  
• Calendars and appointment records showing property visits, tenant meetings, or contractor oversight
  
  
• Receipts and invoices that tie back to your logged activities
  
  

In audits, the IRS looks closely at whether the hours you claim are credible. Logs that appear too broad or inconsistent are often rejected. Specificity matters.

If you use a property manager, document how you are still materially involved (approving repairs, overseeing budgets, or making management decisions). Without evidence of active participation, the IRS may reclassify your hours as passive.

Reps Status Red Flags to Be Aware 

IRS agents are trained to pay particular attention to the following when analyzing returns with losses deducted under the real estate professional exception:

🚩 Wages and compensation for services unrelated to real property.

Solution: Maintain records establishing you meet the 50% of personal services test. It will be extremely challenging to meet this criteria with a full-time, non-real estate job.

🚩 Spouses who both claim real estate professional qualification

Solution: Each spouse meets 750 hours and 50% of personal services tests individually, and time spent has not been combined. Note: spouses’ time may be combined for determining material participation, not for real estate professional qualification

🚩 Material Participation in more than one real estate activity

Solution: Maintain records establishing you meet the material participation test for your rental activity, either directly or via a 1.469-9 Election.

🚩 Your qualifying real estate activity has management fees

Solution: Maintain records establishing you meet the material participation test for your rental activity, either directly or via a 1.469-9 Election

🚩 Claims that you are engaged in a real property trade or business

Solution: Ensure your services used to qualify for the real estate professional tests are directly related to a real property trade or business.

Example: A lawyer specializing in real estate is providing legal services to the real estate industry, not real property services.

Real Estate Professional Tax FAQs

• What is a real estate professional for tax purposes?
  It’s someone who spends 750+ hours a year and more than half their working time in real property trades like development, management, leasing, or rental.
• Why does qualifying as a real estate professional matter?
  It lets you treat rental losses as non-passive, so they can offset wages, business profits, or investment income instead of being suspended.
• What types of activities count toward the 750-hour test?
  Activities include development, construction, acquisition, conversion, rental, management, leasing, and brokerage work.
• Can I combine time from different real estate activities?
  Yes, hours from multiple real estate roles can be added together to meet the test.
• Do real estate professionals still need to make the grouping election?
  Often yes, since grouping rentals makes it easier to prove participation and use deductions, though it delays when suspended losses are released.

ℹ️ If you have any questions about real estate professional tax deductions or benefits, reach out to your tax team at Gelt.

Key Definitions

Rental real estate is any real property used or held for use by customers in a rental activity.

A Real Property Trade or Business is a trade or business engaged in any of the following real property activities:

• development, redevelopment
• construction, reconstruction
• acquisition, conversion
• rental, leasing
• operation, management or
• brokerage